As we head into the final quarter of 2022, many business owners and their employees are wondering about year-end bonuses and raises. This can be a very sensitive and stressful subject for both sides.
Employees are wondering if they will get a bonus and/or a raise, how much it will be and when they will get it. Some employees that are preparing to leave will even wait until the bonuses are announced to hand in their resignation. They may make decisions about their future employment based on these incentives.
Business owners are also wondering about raises and bonuses. An employee has the luxury of only having to consider the effect on themselves and their families. Business owners have many factors to consider.
Who gets raises and how much?
Who gets a bonus and how much?
Where will the money come from for bonuses?
Can the business afford raises?
What expectations have been set or committed to previously?
How will the employees react to what the bonuses/raises are?
Will this affect productivity going into the new year? Will people leave?
Is a bonus a sharing of profit, a reward for loyalty, or a reward for above-average work?
Should the money go to bonuses, raises, or both (or neither)?
What are the long-term considerations of these choices?
While we can’t help a business owner answer all these questions, we can give some assistance with the financial side of these decisions. Here are some things to consider…
Cash is King
If you do not have the cash, do NOT pay bonuses or give raises unless you can get the cash (and borrowing is not a feasible option for this).
If you need the cash you have for upcoming commitments, then set aside the cash throughout the year for bonuses. Plan for the raises as you plan for the upcoming year. It is helpful to even set aside the additional pay for the first quarter ahead of time. The first quarter of the year is often a slow time for many businesses. Having a cash reserve can ease the stress and ensure you can meet your obligations.
Haven’t set aside cash yet? There is still time! This will also help you figure out what you can afford. Some of our clients, using the Profit First System, take from the profit account funds every quarter. They will distribute a small portion of those funds to their employees instead of themselves.
Consider moving bonuses and/or raises to a different time of the year. There is nothing set in stone that a bonus must be given in December or a raise in January. A March bonus and an April raise will be equally valuable - perhaps even more so!
What bank balance are you comfortable with? You may have plenty of cash from someone else’s perspective, but do you want to use that cash for raises and bonuses? Some business owners are happy when their bank balance is above zero. Others do not sleep well if they have less than $200K in the bank. As the owner, you have to decide what you are willing to be comfortable with.
Bonuses and Raises Have Different Consequences
While bonuses and raises utilize your cash, there are different ways that each affects your cash. Bonuses are a one-time larger outlay of cash, but they do not change your employee’s base pay for future raises or promotions. Raises are a smaller outlay of cash in the short term but can add up over time. They increase the base of your employee’s pay, and future raises or promotions will be based on this higher amount. Depending on your employee and the business, a raise may be more valuable to that employee and to your business. The current inflation rate may also affect your ability to pay your employees and their need for a raise. The standard 3% raise will not seem like much to an employee who is seeing their costs go up 8-10%. However, since your costs are going up as well, it is harder for you to afford this large jump.
Other Employee Perks/Gifts
You also have other options to do something for your employees, especially if cash is tight.
Host a holiday party at a local business or host a holiday lunch in your office. Again, calculate the cost of this if you are doing it to save cash.
Give a small gift - perhaps company-branded swag or clothing.
DO NOT give your employees gift cards…unless you want headaches and complaints. Gift cards are considered income to your employees and will have to be added to their W-2 at year-end. Trust us, you don’t want this hassle!
Let everyone leave a couple of hours early one day in December. Pay your non-salary people for those hours and don’t let your salaried exempt employees use PTO for these hours (and make them stop working!). It may be more cost-effective than bonuses and your employees should find this time valuable.
Write a note to each employee. Getting something positive in writing from your boss can be extremely meaningful. Start early enough to get one done for everyone. Also, be careful that you are truthful. You do not want to write how great of a job an employee is doing when they are one of your worst employees and you are going to be letting them go in January. Consult with your HR professional if you have questions about what not to write.
Need someone to help you talk through this to figure out what’s best for your business? We are here, just give us a call.