Paying Bonuses Instead of Salary Increases

As a small-business owner, you are legally required to pay your employees at least the federal or state minimum wage; you are not mandated to give bonuses or salary increases. Traditionally, employers give salary increases and bonuses as an incentive to valued employees. However, more and more employers are paying bonuses rather than salary increases.


  1. Many companies are shifting from traditional salary increases, stating that employees have to earn it as a bonus instead. Because these bonuses are performance-based, only the most productive employees or those who work for a profitable company or division will receive it. Bonuses – once given mainly to executives and those in upper management – have trickled to lower-level employees, such as clerical and support staff. In this case, the bonus may equal 3 to 5 percent of their annual salary. Executives and upper management workers earn considerably more, such as 30 to 50 percent, and 15 to 20 percent, respectively, of their salary.


  1. Companies approach bonus plans in different ways. Small businesses that are highly profitable may use an egalitarian system, which gives bonuses to all employees; in this situation, employees likely receive both salary increases and bonuses. Some companies use a meritocracy approach, in which employees in the same position may earn varying amounts based on their performance. Other businesses use a hybrid approach, in which divisional profits dictate a portion of the bonus calculation; the other part is driven by objectives set for the employee and her fulfillment of them. To gauge employee performance, examine calculable goals, such as sales targets or clients handled, and the employee’s relationship with coworkers and clients.


  1. One of the main reasons employers use bonus plans rather than salary increases is that they do not feel pressured by the economy to increase salaries. Specifically, with fewer jobs being created, employers are not forced into increasing salaries to attract employees. Because bonus plans are optional and may not happen every year, they help you to maintain low fixed costs, which is important to maintaining global competitiveness.


  1. A downside to paying bonuses rather than salary increases is that initially employees may feel disconcerted, viewing the shift as an attempt to lower company overhead; this is particularly true if the goals for obtaining the bonus are unreachable and unfair. To quell employee fears that their salary won’t keep up with the cost of living, small businesses may consider offering them a small raise plus a bonus. Over time, it may be OK to switch some of them to a set salary with performance bonuses.

    If your cash flow is limited or negative, implement performance-based bonuses instead of salary increases. Specifically, when the company is making money, everyone reaps the benefits. Note that some employees may doubt the honesty of this situation; therefore, maintain truthfulness if you use it.