The year is quickly coming to a close, which means employers need to start thinking about something a lot of employees have come to expect and maybe even rely on: the year-end bonus. When it comes to making the company’s holiday gift list and checking it twice, should employers include a little something extra for employees?
As expectations run high around several offices, here are five things to consider before deciding whether or not to dish out a holiday cash bonus:
1. Is it still relevant in today’s workplace?
This beloved corporate tradition has been around for quite some time, giving employees something to look forward to come year-end. But is this long-time tradition still relevant in today’s workplace?
It would seem so, considering a 2014 survey by outplacement consultancy Challenger, Gray & Christmas, Inc. The survey found that nearly 80 percent of the 100 human resources professionals surveyed plan to offer some type of holiday bonus or gift -- up from 53 percent in 2013 -- and about half of the companies awarding bonuses plan to give traditional monetary bonuses based on company, departmental and/or employee performance.
When it comes to the year-end bonus, it’s as relevant as employers make it. Remember: There’s a fine line between gifting employees with a bonus and awarding employees with a bonus.
2. What’s the reason behind it?
When considering whether to tack on a little something extra to employees’ pay during the holiday season, determine the reason behind it. Did the company have an especially good year and it only makes sense to share the wealth? Or did employees perform exceptionally well and personally earn a reward?
Whatever the reason -- or whatever the decision -- be sure to communicate it to employees. Maintain a sense transparency by sharing with employees why they will or will not be receiving a holiday bonus and why. Tim Low, vice president of marketing at PayScale, Inc., explains here:
“More and more, employees want transparency from the leaders in their company. This trend is part of the wave of Millennials in the workforce who are more comfortable sharing the specifics of their compensation package.”
“Bonuses are no different,” Low continued. “If a company is not paying bonuses, managers should communicate the news to employees as early and as broadly as possible so they can maximize their credibility with employees. People understand there are economic realities to running a company which might impact bonuses, so an open and honest approach is always best.”
3. Is it an effective motivator?
Typically, bonuses are treated as a reward for top-notch performance. This isn’t always the case with holiday bonuses, however -- but maybe it should be. Year-end bonuses can become an entitlement, as opposed to a reward. The issue with that is employees may come to expect and rely on a holiday bonus, rather than strive to earn one.
To truly motivate employees, tie the year-end bonus to employee performance. This way, employees will have something to actively work toward and look forward to.
4. How is it treated tax-wise?
It’s important to understand what bonuses mean from a tax perspective before deciding whether to offer them. Bonuses are treated like any other pay and are subject to income tax withholding, as well as Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes.
According to the U.S. Small Business Administration, when withholding income taxes on a bonus, there are a few options:
Treat the bonus as part of regular compensation and figure out withholding accordingly.
Opt to withhold a flat amount of income tax on the bonus -- the flat rate is 25 percent.
Combine the regular pay with the bonus to figure out withholding taxes, but only take the additional taxes from the bonus check.
5. What alternatives are there to a monetary bonus?
Not all businesses can afford cash bonuses -- and that’s perfectly OK. There are plenty of other ways to incentivize and reward employee loyalty and performance. In fact, the aforementioned survey by Challenger, Gray & Christmas found that 50 percent of companies are handing out smaller monetary or nonmonetary gifts.
Alternative bonuses can range from throwing a holiday potluck to custom company hoodies or other swag to giving employees a generous amount of time-off during the holidays.
The important thing is to keep employees in the know as the holidays approach so that they know what to expect and, above all, find a way to show them how invaluable they are to the team -- bonus or no bonus.