Why Giving Out Year End Bonuses is Bad for your Company

One of my coaching clients just sent me a note this morning. The CEO that I've been coaching for about a year now asked if we should give out end of year bonuses or holiday bonuses. He actually called them. I said, you know what, hang on, I just got to grab a quick shower. I'm gonna go downstairs and get my coffee and I'll answer this question for you. No, you should not do end of year bonuses for employees. And I'll tell you the three big reasons why. By the way, before I tell you this, I am known for building great companies to work for. So I'm not saying this in building a bad company. When I was the same second in command for 1-800-got junk, we ranked twice ranked as the number one company to work for in British Columbia. And then in my second last year, we ranked as the number two company in all of Canada to work for. There were 1.46 million companies in Canada. We ranked number two. When I left there 13 years ago, I started coaching CEOs on growing great companies. Since then I've coached two companies that went on to rank number one to work for in Australia. I coached one company that went on to rank number two to work for in the United States. I coached another that ranked number 12 to work for in the United States on Glassdoor. And then I coached another number one company to work for in British Columbia. I coached the number two company to work for in British Columbia. So I'm really well known for building great companies and in building a great company to work for. It's not about the end of your bonus and here's why. First thing is, employees should be paid and taken care of based on Maslow's hierarchy of needs. We're actually going to be covering this at our next COO alliance event. We have a two day event coming up in February where second in commands will be spending two entire days around mapping their company towards Maslow's hierarchy of needs and building a world class culture. But if you give a bonus at the end of the year, especially if it's a big goal bonus, like let's say it's a five thousand dollar bonus you're going to give to an employee and they make, you know, 50, $60,000 a year, that $5,000 bonus to them is so meaningful for two weeks, but they probably go out and buy some stuff with it that they don't need and then they feel the crash afterwards, that quick little, you know, happiness spike. They didn't feel it for the rest of the year and for the other 11 and a half months of the year, they're probably feeling like they're underpaid already. So what I like doing instead of paying the Christmas bonuses is paying people fairly all year so that they're paid well and setting really good expectations with them that you expect good results from them. The second reason why you don't want to give out the end of your bonuses for people is it doesn't actually change behavior. It really does not change the behavior of the individual throughout the year. It doesn't drive them towards greater and greater work effort. So there's actually some, some commentary around this. Dan Pink did a video, I think it's a main stage TED Talk from around 10 years ago called the Science of Motivation. If you look up his name, he'll talk about how bonuses, especially in the creatives, really actually hurt people because they feel like they're being paid to produce something that they were already working hard to do. The reality is A players, and even really good solid B players are already working hard. You know, when I was the second in command at 1,800 got junk, a year end bonus wasn't going to make me work any harder. I was already working as hard as I was ever going to work and, and a year end bonus really wasn't going to do anything. It might have satisfied me for a short burst, but it didn't actually change my behavior. Second part of that annual or you know, year end bonuses, we often tend to use it as a recruiting tool. So when somebody's negotiating for more we always go, oh. But at the end of the year we always give a bonus as well. So you'll get an extra couple grand there too. It then becomes more of an expectation or a right. So it becomes a little bit sloppy. People always think about, you know, should I give pay raise at the end of the year as well? I'm again, no. So the reason for this, once a year I will give all of my employees a pay raise due to inflation. So you give a 1 or a 2% bump in pay due to inflation. And then I also work every year to make sure I raise my prices accordingly. But I'm not going to give a 5 or a 7% pay raise to somebody because they worked hard. The reality is I hired them to work hard. I hired them because they're hard workers. I expect to get results from them. That's why I hired them. That's why they had to work for me. And the same with all of the clients that I coach. It's that same expectation, if you are working really hard throughout the year, not only are you going to get to work with me, you're also going to feel the satisfaction of being working within the company. But I'm not gonna pay you extra at the end of the year to say thank you. In fact, you get to keep your job because you did your job for the first year. So it's a bit of a mind shift difference that I'm gonna allow you to keep your job during the year or I'll fire you if you're not giving the results, but I'm not gonna give you a bonus for getting them. Now, if somebody really knocks the COVID off the ball and does an amazing job through and maybe I'm going to be promoting them, then at that point I'm going to give them a pay raise. But the pay raise is going to be tied to the promotion that we're giving them. Not because it's the end of the year or because I feel some obligation, but they're getting more responsibility, maybe a new title and maybe pay that's being bumped according to that. So no, I do not like doing end of year bonuses because it's Christmas or because it's the holiday season or anything else. It does not make me Scrooge. It makes me understand the science of motivation of people and what's actually going to satisfy people throughout the year. So I like paying people fairly throughout the whole year so they feel good about themselves day to day and that they know that they're being taken care of. And then paying them accordingly, usually at the 85th percent on the bell curve, is where I pay people. Now here's the only caveat to this. This is the big difference. Let's say at some point you as an owner are feeling generous or feeling like, wow, we really knocked the COVID off the ball. And I'm just feeling like especially blessed with my team and my people. Then maybe you will, out of the gratefulness, give them a bonus. Because it's a bonus. It's like a thank you, but it's unexpected. And I like doing those at random points throughout the year. You know, I had an employee this past year who was struggling with something and I realized with it and I sent him some money so that he could put a deposit down towards a car because he was driving a crappy old vehicle and he had new kids. And so I just sent him a deposit so he could go out and get a, get a vehicle. And he was like overwhelmed. But it was an unexpected bonus, but it was also tied to the fact that this person had been working super hard throughout the year and getting really, really good results. So Sam Davies said vacation days are piling up at the end of the year. If we force user lose it policy will not have anyone working in the month of December. Do I suggest paying out cash equivalent? No. Again, the way that I treat my vacation policies with all my clients I try to get them to do is to pay five weeks paid vacation. I want them to take 25 days off. I don't want to just give them more money. I want them to not burn out. I want them to actually take time off and disconnect. So what I do is I have a use it or lose it policy on the five weeks paid vacation. And then every month of the year I'm pushing employees to take some time off to take some days off. In fact, one of my team, I know he works too much and I've been telling him book some time off. Right now, one of my other employees, I had him calculate the amount of money that he would be charging me because he's a freelance employee and I'm paying him to take time off even though he's a freelancer. I want to pay him 25 days to not do any work for me so that he can actually decompress and do his music and hang out with his kids. But no, you do not want to pay people out for the days they didn't take. I want them to take the days off. And if you haven't managed that properly throughout the year, that's really a sign that the leader has a missing system inside the company. When your employees realize that every month you're pushing them to book another day or pushing them to book another two days, they're like, wow, you really care about me. And if you start teaching them to take one week around Christmas or New Year's, two weeks in the summer, and then scatter the other 10 days throughout the year over three day weekends, making them four day weekends. It usually actually works out quite well. But again, they have to see you helping them manage that for them to understand and feel good about the fact that it really is a paid vacation. And I don't like unlimited vacations at all because people don't take vacations. So no, I really don't like the paying of cash equivalents. Somebody said, I agree with the immediate 2% for the new year. And again, it's not an, it's not a 2%. I usually do 1 or 2%. I actually usually tie it to inflation. Inflation. So if I was running a bigger organization, I would take a look at what they say the inflation numbers were. If inflation was up by 2.4%, I might give everybody a 2.4% pay raise. But the whole 5 to 7% because you did a good job. No, you get to keep your job because you did a good job. You get fired if you don't do a good job. But there's my thoughts related to end of year bonuses. Hope that's helpful.