When is a Bonus not a Bonus?

“And yet, you don’t think me ill-used, when I pay a day’s wages for no work.” That statement by Ebenezer Scrooge to Bob Cratchett in 1843 recognized the then relatively new custom of letting wage-earners have a day off for Christmas without docking their pay. One hundred and seventy years later, business owners aren’t just expected to pay for a day of leisure. Now we have the tradition of the “holiday bonus,” where employees are given additional money beyond their salaries at the end of each year.

As we enter the annual Holiday Season, the advisory groups we operate as The Alternative Board® always bring up the question of how to bonus at year-end. Not giving anything is nearly unthinkable, although it has occurred more often with the economic challenges of the last few years. Should the Holiday Bonus be tied to some performance measure, or is it strictly a sign of the owner’s largesse towards his or her employees?

The first known use of the word bonus was in 1773. It’s defined as “Something more than is expected or strictly due.” But what is it when the “something” is not only expected, but is perceived as due by the recipient?

Incentives fail the basic definition above. If an employee is due money by contract or understanding in return for specific performance, it isn’t strictly a bonus. Yet it has become an accepted use, and is widely understood in that context. Similarly, if a payment at year-end is given according to a generally understood formula, such as years of service or salary level, there is no surprise attached to the payment.

How do you deliver the bonus? Many employers just add it to the normal paycheck. I know a number that complain every year that less than 10% of their employees say “thank you.” That argues strongly against it being unexpected.

Others have a documented program for earning incentive payouts, such as a share in the profitability of the company. These are paid at holiday time, partially to avoid the expectation of something additional. They are called holiday bonuses, but are actually just annual performance incentives with convenient timing.

A real Holiday Bonus should be a gift. It deserves to be credited for what it is; money coming directly from a business owner’s pocket to the employee’s as a sign of thanks and goodwill. It shouldn’t be attached to specific performance, although some subjectivity is normal and appropriate. Like Fezziwig’s Christmas party, it s something you do in the spirit of the season, without expectation of material return, and it is supposed to generate some feeling of gratitude.

As a gift, the Holiday Bonus should be in the range of gifts you would give to others you spend the whole year with (hint: that should be your family.) Why would you spend $300 on gifts for a spouse or child, and $1,000 on an employee? Do you like them that much more?

If you already have a structure for year-end incentive payments, by all means keep to your commitment. If you traditionally tend to “throw in a little extra for the holidays,” don’t. Make that a separate check, preferably on a separate payroll. Make sure that the employees can differentiate “normal” payments from your gift.

Include a note with the bonus. In most cases, telling the employee how much you value their contribution means as much or more than the money. I would be surprised if the addition of a note doesn’t at least quadruple the number of “thank you’s” you get.

If substantial year-end payments are traditional and expected, but historically subjective, start to change that now. Designate part of the payment as related to company or individual performance, preferably with a reference to profitability. Then give the rest as a bonus.