Dispatch #79 - Thinking about end of year bonuses?

Several business owners tell me they want to give year-end bonuses to their field and office teams.
 
Their motivation is altruistic. They want to recognize the hard work, sacrifice, and solid performance of people―both in general and especially during another difficult year of COVID-19.
 
And their motivation is practical. They want to recognize and retain valuable employees in an especially tight labor market.
 
So here I’ve collected my thoughts and offer some tips to consider.
 
First, what year-end bonuses should not be: a last-minute attempt to make up for inadequate compensation plans. When an employee considers whether to stay with your company or be tempted by poachers, their decision should not come down to compensation. Pay in the right range throughout the year. Take money off the table as a potential sore point.

Nor are bonuses a substitute for objectively measured performance-based bonus plans. Instead, we’re talking here about year-end, discretionary bonuses.

So what are some characteristics of effective bonus plans? The employee won’t be surprised by her or his year-end bonus. Or maybe pleasantly surprised, because it’s a little more than expected. You don’t want them disappointed. If it’s going to be a skinny or no bonus year, they should have received signals about that already.
 
Bonuses should reflect the year’s results but be tempered by how well the firm is positioned with regard to cash flow, backlog, and credit, plus the degree of uncertainty it's facing in the current pandemic recovery economic environment.
 
At the low end, a bonus may be a modest but impactful “thank you.” At the high end, it can make a top performer feel valued for an unusually high level of accomplishment.
 
Balance bonuses among field, operations, and office people: everyone contributes to the company’s success.
 
The bonuses can take the form of a perq, a gift card, a 401k profit sharing contribution, and/or a W2 paycheck bonus. They should be individually considered but fairly distributed, unbiased, and, in all meaningful respects, HR-compliant.
 
Large bonus payouts should be factored into year-end tax planning, both their amount, and whether they can be accrued this year and paid out early next year.
 
Along with their bonus, employees might receive a pie chart of her or his total compensation, reinforcing the value of the company’s benefit programs. But every person’s bonus will be accompanied by a sincere expression of appreciation.
 
Finally, but equally important, bonus time provides an opportunity to speak not only to the individual but also to how the company as a whole is doing. Done skillfully, this can strengthen the bond between the one and the whole.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.