As stockings are hung by the chimney with care, workers have high expectations that holiday bonuses will soon be there.
The practice of giving bonuses looks a little different today amid soaring inflation and recession concerns. While many companies stick with protocol, and some even provide rewards specifically because of economic conditions, the way companies calculate bonuses is evolving.
Analysts say companies across industries are rewarding good employee performance in a tight labor market with end-of-year incentives.
"We still look at bonuses as a reflection of prior performance and profits earned."
President and CEO, Hawkins Construction
"This has been a funny year in terms of compensation planning, and the importance of the bonus this year is greater than it has been in years past," said Tony Guadagni, senior principal for the Stamford, Connecticut-based Gartner HR practice. "The last year has really been dominated in the news by talks about inflation and about what has been happening to employees' purchasing power based on their real wages going down as a result of that inflation."
Consequently, employees across industries have a "heightened expectation this year for bonuses than in years past," Guadagni said. Gartner data from Q3 shows that construction employees expect their year-end bonuses to be 4.2% higher than last year.
"Organizations need to be aware of what these expectations are, and that if their bonuses aren't going to meet those expectations, that's really going to change the way you communicate," Guadagni said.
Best practices for giving bonuses
Put extra value on transparency and considering performance-based bonuses, Gaudagni said.
"Your highest-performing employees are really the ones that you need to retain, and they should be rewarded commensurate with their contributions to the organization," Guadagni said.
Omaha, Nebraska-based Hawkins Construction incorporates transparency and a performance aspect into its bonus structure, said Chris Hawkins, the company's CEO and president. Earlier this year, Hawkins’ hourly workers received two $1,000 payments to account for inflation. That hasn’t changed their bonus calculations.
"We still look at bonuses as a reflection of prior performance and profits earned," Hawkins said.
Hawkins tries to be transparent with allocation, but some manager discretion goes into each calculation for both jobsite and office employees. There's no perfect solution, Hawkins said, but the company prioritizes ensuring that everybody shares in profits and feels motivated to continue performing well.
"Three or four years ago, the environment was radically different. Now, I want people to feel empowered that if they're making more money, it's because of their position on the team.”
Company President, GI Stone
Revealing the exact formula for calculating incentives can have the opposite effect and result in negative behaviors.
"We found that when we tried to be too formulaic we got some people really focused on that and not so much on the more important elements like culture and broader performance requirements," Hawkins said. "Formulas can be gamed, and that can change incentives."
Gifts are good, cash is king
Illinois-based stone subcontractor GI Stone will continue its practice of giving end-of-year gifts. This year, employees will receive a monetary gift — $500 — in addition to the usual gift basket.
"People want cash. Even if it's a smaller reward, it usually carries more weight if it's in cash compensation, more so than something like goods or donations."
Senior Principal, Gartner HR practice
GI Stone started giving monetary gifts during the start of the COVID-19 pandemic to show appreciation for employees' extra work and to retain good employees during the labor shortage. The company's holiday gift-giving practices have grown to focus more on building a strong culture, said Sandya Dandamudi, company president.
"Three or four years ago, the environment was radically different. Now, I want people to feel empowered that if they're making more money, it's because of their position on the team," she said.
Monetary bonuses are the best practice, according to Gartner.
"People want cash,” Gaudagni said."Even if it's a smaller reward, it usually carries more weight if it's in cash compensation, more so than something like goods or donations."
Gartner data indicates that 53% of organizations that use short-term incentives plan to keep those budgets the same in 2023, 20% plan to increase those budgets and 4% plan to decrease them.
But a cooling economy signals changes in how compensation planning decisions are made. Typically, base pay and bonus decisions are made earlier in the year, but that shifted in 2022. It's too early to determine if that will continue, or even accelerate, next year.
"One of the things that we've seen this year is that these decisions are being made and then revisited much later in the year due to the very, very dynamic compensation environment at the moment," Guadagni said. "It's very hard to predict a year further than that."
Hawkins noted that basing the short-term incentive structure on past performance means the bonus pool can fluctuate. Therefore, inflation and a potential recession might result in lower incentive payments next year. The overall bonus program will remain, though.
"We try to be very intentional with our bonus program," Hawkins said. "We want to encourage people to be champions for themselves, too ... and this program gives them good reason to.”