Bonuses are a way to show your gratitude to your employees. They should be meaningful, send the right message and not leave you out of pocket. Between cash, stock or reward bonuses, which one is the best fit for your company?
Sadie* turned the lights off in her office and broke down in tears. She had just sent a reply to her CPA’s email with the subject line “NO raise, NO bonus”. As she locked the building, she was getting ready for a long conversation with her husband, justifying the move she’d just made. The family owned business she’s been sharing with him for the past 20 years wasn’t in a good place. The accounts didn’t look “healthy enough for pay rises or bonuses” the CPA advised.
But the CPA didn’t know that Jake from reception wanted to propose to his 7-year long fiancee. Or that Nicky really needed to get a new car, just so that she can make it to work every morning. She knew though. It was her job to know each and every one of these people. Not the CPA’s.
It wasn’t a good move to go against the advice. She will probably need to dip into her family’s savings to cover the red line threatening the business cash flow. But she just couldn’t sleep thinking of these people that trust her, depend on her and hope their employer will do the right thing and give them a bonus for the hard work and extra hours they’ve delivered on.
So to do the right thing, Sadie had to make a compromise between her heart and the business’ checking account. She halved the bonuses, because something is better than nothing. Now she had to find a way to explain this to her husband and to somehow cover their accounts.
This was the story that poured out the first time Sadie and I chatted. She was heartbroken and on the brink of serious debt. It’s also the story of many entrepreneurs that care deeply about the fate of the people they employ. And bonuses are just a way of showing them they care.
We are mostly used to hearing the perspective of the employee who loves that Christmas bonus.. But there is another perspective less talked about; the one filtered through the eyes of the entrepreneur that sometimes takes the wrong decisions with the right heart.
So let’s shed some light on what bonuses are and how you should plan for them. But also how to offer meaning to your employees and make sure you don’t leave your business in debt.
Types of bonuses
There are many different type of bonuses out there, categorized by occasion (holiday, sign-up), but for the purpose of this conversation we will only consider them based on their nature:
- Cash and financial rewards
The most straightforward type is the bonus that comes in the form of cash or another financial reward (like vouchers). These bonuses can be offered as a one-off and sometimes it is an option considered by businesses that can’t afford to commit to the long-term expense of a pay-rise.
|✅ They’re a fast incentive||❌ Short lived sense of reward|
|✅ May be preferred in some industries||❌ Short lived sense of reward|
|✅ Can replace a long-term financial commitment (like a pay-rise)||❌ Expensive|
|❌ Unsustainable in the long run|
|❌ Subject to tax|
And in terms of value, it’s been long known that cash bonuses do not in fact have the intended effect; to breed employee loyalty and retention.
2. Stock options in the business
Most common in the tech and start-up landscape, this type of bonus takes the most common form of an RSU (restricted stock unit). However, as it exposes the employee to a higher risk, it is not always a readily accepted bonus.
|✅ Breeds long-term loyalty||❌ Typically applies to public companies|
|✅ Can replace a long-term financial commitment (like a pay-rise)||❌ Complex when the company is privately owned|
✅ Can replace a long-term financial commitment (like a pay-rise)
|❌ Diluting ownership|
|❌ Harder to convince employees|
|❌ Loss of privacy (from business expense to intimate financial details, your employees will have access to everything)|
Stock options are a popular bonus in Silicon Valley, but unless you’re running a fresh tech start-up, or a large corporation, you are less likely to attract interest from your employees with this type of bonus.
3. Non-cash reward bonuses
These are bonuses that can include anything from creative means of recognition (employee of the month, extra vacation days) to year-long memberships focused on a better work-life balance with gym, cinema, coffee and other perks.
|✅ More relevant to today’s generations||❌ Can show favouritism|
|✅ Motivational||❌ May not be what employees need|
|✅ Can be shared with friends, family and colleagues|
|✅ Breeds loyalty|
|✅ Can be very inexpensive or even free|
When it comes to experience-led rewards, research shows that 1 in 5 employees are more responsive. There are other ways to incentivize your staff too. For example, a corporate volunteering program can increase productivity and workplace happiness throughout nearly half the workforce.
Each type of bonus has a time and a place and every business owner will know what is the right bonus for his or her team. But the one thing a bonus should never do is to leave your company’s account in the red.
When I started working with Sadie we established goals for the financial year ahead, looked at the forecasts and, as this was essential to her, we made room for employee bonuses. However, once she had the big picture of her business’ financial plan, we could look at more creative ways to bring in a reward-based scheme all year round.
*Not her real name. I take my clients’ confidentiality seriously and while the stories are real, the names will always be protected under an alias.