Benefits and Disadvantages of Giving Bonuses to Employees (2024)

Companies reward bonuses to employees to encourage them to work hard throughout the year.

Your company can also take advantage of bonuses to engage your employees and enhance productivity.

But before giving it, you should analyze your business strategy to establish the goals that you want to achieve after rewarding employees.

The most common type of Bonus for employees

Some bonuses are paid out monthly, while others are paid out annually. On the other hand, some occur only once, while others occur on a regular basis:

The Annual Bonus: Typically, a yearly bonus depends on the organization’s overall performance. As a result, the size of your bonus will be determined by the year’s overall success of your organization or department and the extent to which you contributed to that accomplishment.

Spot Bonus: An extra reward for going above and beyond is given to individuals who earn a spot bonus. Most of the time, it’s a one-time activity, but it can happen more frequently depending on your leadership, money, and goals.

Signing Bonus: You may be eligible for a one-time signing bonus when you accept a new position.

Bonus for Retention: The goal of a retention incentive, like the goal of a signing bonus, is to keep key employees.

A Referral Bonus: Referral bonuses are given to current employees as a way to motivate them to recommend qualified job prospects against the available positions. Usually, it isn’t offered until after a candidate has been employed and has been with the company for a specified period of time.

Benefits of Giving Bonuses to Employees

Why give bonuses to employees? After a company provides a bonus to its employees, it gets benefits of bonuses in the following ways:

1.Increased Motivation

Providing bonuses may drive them to work harder and contribute more.

Tip: Consider defining performance targets for your workers to aim toward before giving a reward.

For instance, if you operate a small software business, you could provide a bonus to employees who have raised their sales by 10 percent over the last 12 months.

In this way, bonuses will offer an incentive for employees to meet a required objective.

Importantly, it is always the right time to give employees greater responsibility after a bonus since their levels of motivation and morale are higher then.

2. Lower voluntary turnover (meaning lower recruiting costs)

Staff that receive an exciting incentive are more likely to feel pretty compensated and exhibit a commitment to your firm.

Loyal employees are often pleased and less eager to explore other career possibilities, saving you time and cutting recruitment costs.

For example, if you pay a recruiter a 10 percent charge for each new hire, and your average employee wage is $75,000 per year, you save $7,500 in recruiting fees for each staff member you retain (simple math!)

3. Builds Team Collaboration

Bonuses help to increase team collaboration as every team member knows that every individual is important for better performance. Team collaboration plays an important role in improving performance.

Consider offering a team bonus to your employees if your company’s quarterly income rises for four straight quarters. And since it will ensure that everyone gets the bonus, you will have a common goal for your team to work toward.

As a result of achieving the objective and obtaining the reward, your workplace communication improves.

4. Encourages healthy competition within the workforce

Bonuses to employees help create a small friendly competition among your employees.

Bonuses can be given to your top performers. That way, employees will likely improve their output to win the bonus.

Moreover, provide your employees with a weekly performance report to keep the spirit of competition alive for the month. It is because having employees compete for a monthly incentive boosts morale and identifies your top performers.

Lastly, employee bonuses can increase your business’s efficiency in various ways: Employ a combination of individual and team bonuses to create both team and individual healthy rivalry, which will benefit the company.

Read More: Advantages And Disadvantages Of A Reward System For Employees

The Disadvantages of Giving Bonuses

There are no disadvantages of giving bonuses to employees itself. Rather, it is made flawed by the unrealistic expectations from both employees and employers:

1. Impossible Dreams

Bonuses for employees can positively and negatively affect a firm and its employees.

Employees may develop false expectations from bonuses.

Employees may demand bonus payments even if a small business doesn’t have the funds to do so. And if it does provide generous payouts one year, it may suffer losses the following year.

Employees’ morale can be damaged due to their own expectations.

2. Competition amongst workers may get ugly

Employee bonuses may also have the unintended consequence of encouraging rivalry rather than cooperation among workers.

However, it is more likely to result when a company already has a toxic workplace culture. So, in such a case, the existing unhealthier culture must be blamed.

3. Bonuses are taxed

This is not really a disadvantage of giving bonuses to employees but a result of a country’s tax policy where a company is operating.

Because bonuses are subject to unique tax withholding rules, the amount of money employees receive when paid dividends can be drastically reduced.

In the USA, bonuses are typically taxed at a rate of 25 percent, but this can rise to 35 percent for people with high earnings.

Nevertheless, taxpayers may be able to reclaim a portion of bonus pay that has been withheld from their paychecks.

Bottom Line

Before deciding whether or not to implement a bonus program, analyze the larger picture and make it align with your goals.

Importantly, bonuses are always helpful, with the exceptions of a few mentioned above.

Last but not least, you should try BRAVO! if you need help with rewarding and recognizing your employees. So, schedule a demo for free today!