Holiday bonuses becoming
a ghost of Christmases past
By Robyn A. Friedman • Bankrate.com

A once-common practice among small business owners -- giving holiday or Christmas bonuses without regard to performance -- is turning into a thing of the past.

According to an annual survey of businesses by the Bureau of National Affairs, the percentage of organizations giving year-end bonuses or gifts to employees has dropped for the third straight year, from 41 percent in 1997 to 37 percent this year.

Where they are given, these holiday bonuses are most often tied to the bottom line.

"Most bonuses in the United States are payable on the achievement of preset goals and objectives," says Brent Longnecker, executive vice president of Re:sources Connection in Houston and an expert in executive compensation. Typically, he says, the business owner sets a threshold level of performance for an individual or a business unit. If it's achieved, the employee or unit earns the bonus.

Paying for performance
According to a study by William M. Mercer Inc., a Philadelphia-based human resources consulting firm, the number of companies using performance-based bonus plans doubled between 1995 and 1998.

"Companies want people focused on really improving their situation," says Michael Prushan, general manager of Management Recruiters International of Cherry Hill, based in Philadelphia. A bonus gives a worker an incentive to go beyond the expected job duties, he says

Bonuses do more than reward employees for good job performance. They breed loyalty and raise morale. With the unemployment rate at its lowest point in 29 years and labor markets tighter than ever, employers need to keep their employees happy to retain them.

The lowdown on holiday bonuses

"Not only is there a shortage of talent, but when you combine that with the 'dot.coms' sucking out talent at a record pace, it becomes critical that bonuses be good," says Longnecker, who predicted that bonuses would increase this year. "Performing companies are putting more 'pay at risk,' especially at the executive levels. Top performers are also letting more employees be eligible than ever before. This trend does not look like it will stop any time soon."

Company spending on performance-based bonus plans has shot up in recent years, according to a survey released in September by Hewitt Associates, a human resources consulting firm based in Lincolnshire, Ill. The 1,133 business owners in the survey also said they'll spend even more on performance bonuses next year -- 9.6 percent of their total payroll.

Bonus advice for employers
Experts offer the following advice to companies planning to give employee bonuses this year:

• Establish a plan. Don't wait until the last minute to decide if bonuses will be awarded this year. Plan early and establish a specific bonus plan. "Set up a system to assure that bonuses are not given out without the company experiencing increased revenues," says Laura Michaud, an Elmhurst, Ill.-based business consultant who specializes in employee recruitment and retention issues. "There are many cases where companies get caught up in paying bonuses to people for performing a certain way, but don't assure that they also had increased productivity."
• Set goals. Bonuses should be tied to clearly set goals. The goals should be achievable, concrete, measurable and important to the success of the business. Most important, the goals must be communicated to the employees.
• Avoid giving and taking away. Once a bonus plan is established, stick to it. "A bonus plan can work against a company," Michaud says. "Yes, it feels good and may keep employees' morale up. But companies absolutely should not offer bonuses one year and take them away the next if they find the bonuses just cost them more and they didn't receive a benefit. Then you have a major problem to undo, and morale will be lost."
• Don't give it all as cash. To really encourage employees to stay, consider giving part of the bonus in cash and the balance in restricted stock or stock options, suggests Longnecker. "This effectively puts 'golden handcuffs' on the talent (because) they have to stay two years to get (the stock)."
• Consider giving them at other times of the year. Bonuses will have the same benefits to a company no matter when they are given. Consider giving bonuses at other time for jobs well done. "The best way to keep people motivated and loyal is to recognize them immediately after they have done something exceptional," says Michaud. So have a bonus budget and hand out a portion of it to an employee who has done something stellar. Michaud says that the bonus does not have to be in cash; theater tickets or dinner for two at a fine restaurant can achieve the same results of recognizing the employee and improving morale.
• Ensure that the company will receive a benefit from the plan. When it comes to bonuses, "Be careful on how you give them and what you give them for," says Ritchie Lowry, a professor of sociology at Boston College. "There was a brokerage firm about four or five years ago that gave bonuses for those employees who had the best accounts. They found that all the employees did was churn the accounts." The moral of the story: Make sure you reward meaningful behavior that benefits the company.

If you do give a holiday bonus, keep in mind that all but the most nominal of gifts will have tax consequences. A fruitcake or other token with minimal value is not taxable, but if you give your employees cash, a gift certificate or something else easily exchanged for cash, you'll have to share the holiday spirit with the IRS.

The agency considers the gift as extra wages; they must be reported as income and taxed.

Robyn A. Friedman is a freelance writer based in Florida
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-- Posted: Dec. 20, 1999