By Jason Tchir

Bonuses are on the minds of many employees and managers, who are watching their companies’ metrics to see what fortunes this year might bring. But while bonuses might seem like a sure-fire way to motivate employees, the truth is more complicated.

“They’re a part of rewarding employees for achieving and overachieving – but they’re not just driven by sales for everybody,” said Jason Greenspan, chief executive officer and founder of Whbonusoosh Inc., which makes screen cleaners for mobile devices. “If it’s just about sales, it can create this toxic, competitive culture where I just hit my number and I’m done.”

Whoosh allots bonuses based on individual and company performance targets, which vary depending on the employee’s role, and says they’re just part of a fair compensation package.

 “I think bonuses are important. We have corporate targets that have to be met for there to be a bonus pool for everybody,” Mr. Greenspan said. “But they’re not the be-all and end-all for us.”

Small businesses, especially in the early years, may consider giving employees bonuses instead of committing to higher salaries. But there are risks, says Dan Kelly, president of the Canadian Federation of Independent Business.

“Bonuses can be helpful, especially in an environment where you’re just not able to build up that base pay because you can’t be confident sales will be there. The problem is, you can underbonus and won’t get the growth you need, and you can overbonus – and if you hit the gas too hard in the bonus side, you’re left with little money to pump back into the business.”

A bigger question you need to answer is why you’re giving the bonus in the first place. Research shows that bonuses – and other incentives – only make employees work harder if they understand exactly what they need to do to get it, said Marc-David Seidel, an associate professor of organizational behaviour and human resources at the University of British Columbia’s Sauder School of Business.

“It has to be clear,” said Dr. Seidel, who has a PhD in organizational behaviour. “If you don’t do it the right way, it can create competition and resentment – like if you have a team of 10 people and five do all the work, but they all get bonuses equally.”

Not only that, giving people a bonus for parts of their job that they’re already “intrinsically motivated to do,” can actually make them less likely to work as hard, Dr. Seidel said.

Employees care about more than money – and cash alone won’t make them drive a small business to succeed. Small businesses need to recognize that they may not be able to afford to pay the “top drawer” compensation that a large firm may offer, the CFIB’s Mr. Kelly said. But they have other advantages over big businesses.

“Studies show employees rate working at a small business very well on many indicators – access to decision makers, interesting work, flexibility, less bureaucracy – but compensation isn’t the highest,” Mr. Kelly said. “Our advice is [for small businesses] to try and focus their offerings on non-monetary parts of compensation, like flex time, an extra week off at Christmas and the ability to work from home where relevant.”

Giving employees future ownership potential in the company – through profit-sharing, stock options or options for future stocks – can “get them lined up with the goals of the organization, and you don’t need to offer money or a reward,” Dr. Seidel said.

“The benefit of stock is that it doesn’t cost the business owner a lot in those early days,” Mr. Kelly said. “And it gives employees a stake in the future of the companies.”

Weever Apps Inc., which makes an app that lets companies track workers in the field, pays competitive salaries but does not give out bonuses.

“If everyone feels that they’re in this together, then seeing the company make progress should matter – and not an explicit dollar amount tied to a perceived performance,” said Andrew Holden, Weever’s chief technology officer. “There are specific roles, like a salesperson, where tying a bonus to performance makes sense – but when you’re working with engineers, a lot of the most intractable problems are the most hidden ones where they’re taking ownership of processes and making them work better.”

Generally, bonuses tend work to motivate employees in financially oriented companies, but not necessarily in creative fields, Dr. Seidel said.

“If you say, ‘If you’re more creative today, I’ll give you a $100 bonus’ – it doesn’t really work,” Dr. Seidel said. “If you say, ‘I’ll give you more flex days where you can work from a café or from home’ – that might matter more to them.”

If you’re trying to decide whether to offer bonuses, you should ask employees whether they want them – or want that same amount, say $2,000, to spend on things like braces for their kids or massages, Dr. Seidel said.

“They can be really up front. Say, ‘Look, we’ll have this much of a budget to spend,’ and give as much flexibility as you can to let employees decide what they want,” Dr. Seidel said. “Certain employees will be motivated by every cent of a bonus that you give them and others will care more about being respected and good perks.”

 

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