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The Battle of Benefits: Salary Increases vs Bonuses for Retaining Employees 

July 3, 2024

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Person wearing an orange safety vest hands a small envelope to another person, hinting at discussions around salary increases vs bonuses for employee retention.

Employee retention is undeniably a valuable long-term investment. It reduces the hassle of constantly looking for new skilled workers, which helps increase productivity and saves money that would be spent on hiring.

Nowadays, many things make employees want to stay at their jobs besides money. These include a good balance between work and personal life, a positive work environment, and chances to grow in their careers. However, financial rewards like pay raises and bonuses are important in keeping employees motivated.

How Financial Incentives Affect Employee Performance

According to a survey by PWC, 57 percent of employees say money is their biggest stress.¹ These stressed employees admit to being distracted at work, and their money worries make them less productive. Also, 36 percent of employees who are stressed about money are twice as likely to look for a new job compared to only 18 percent of those who aren’t stressed.

Giving financial incentives can greatly help with this situation. For example, a study by the Incentive Research Foundation found that incentive programs can boost employee performance by up to 44 percent.²

Salary Increases vs Bonuses: Which is Best for Retention?

Salary increases give employees a steady and reliable source of income, helping them feel more financially secure and committed to the company. They show that the employer appreciates and trusts them, which can boost morale and loyalty. A high base salary can also attract top talent, making it easier to hire great people.

However, these merit increases are a long-term cost for the company, which can be a big financial commitment if the company’s performance changes. Plus, the excitement of a pay raise can wear off over time as employees get used to the higher pay.

Bonuses, on the other hand, are more flexible because they can be linked to individual, team, or company performance and adjusted based on financial performance. They provide an immediate reward for reaching specific goals, which can improve short-term performance. Since bonuses are usually one-time payments, they don’t permanently raise payroll costs and can be managed according to the company’s financial situation.

However, the disadvantages of bonuses include employees seeing them as less reliable than pay increases, which can affect their financial planning and job security. While bonuses can motivate employees in the short term, they might not build long-term loyalty as compared to salary raises.

Bonus vs Raise: Finding the Right Balance

Given the strengths and weaknesses of both raises and bonuses, the best way to keep employees is often a balanced strategy that uses the benefits of both. Here are some tips for creating an effective retention strategy:

1. Consider Using Performance-Based Bonuses

    A PayScale survey found that 66 percent of U.S. employees prefer bonuses linked to their performance.³ Performance-based bonuses give employees a clear reason to work hard and meet their goals. By setting specific targets and linking bonuses to reaching them, you can encourage high performance and still be flexible with your pay strategies.

    Performance-based bonuses also help manage resources better. Since bonuses are usually one-time payments, they can be adjusted based on how well the company is doing financially. In good years, you can give bigger bonuses to reward great work, and in tougher times, they can give smaller bonuses without changing regular salaries. This way, companies can control costs while still giving valuable rewards to their employees.

    2. Encourage Open Communication

      Employees need to understand how their salaries and bonuses are decided. Clear communication helps build trust, prevent misunderstandings, and manage expectations. By being upfront about the company’s compensation policies and any potential changes, employees are less likely to be caught off guard by adjustments in their pay.

      Effective communication means more than just explaining pay structures. It also includes giving regular feedback on performance, recognizing achievements, and discussing career development opportunities. When employees feel informed and involved, they are more likely to be motivated and dedicated to the company’s success.

      3. Invest in Employee Development

        In addition to financial incentives, investing in employee development can enhance retention. Offer training and career progression opportunities that help employees grow within the company. This can be done through mentorship and learning sessions. These opportunities can provide employees with a clear path to advancement and the skills needed to achieve their career goals.

        4. Listen to Employee Preferences

          Understand that different employees may have different preferences when it comes to compensation. Some may prefer the stability of regular salary increases, while others might be more motivated by performance-based bonuses. You can conduct or hold discussions to gather employee feedback to help identify these preferences and adjust the compensation strategy accordingly.

          Personalizing the compensation approach to meet individual needs can greatly improve employee satisfaction. For example, younger employees may value career development opportunities and performance-based rewards, while more experienced employees might prioritize salary stability and retirement benefits. By recognizing and addressing these varying preferences, companies can create a more inclusive and appealing work environment.

          Additionally, offering flexible compensation packages can cater to diverse needs. Providing options such as additional paid time off, remote work opportunities, or wellness programs can complement traditional financial incentives and enhance overall job satisfaction. A tailored approach shows that the company values its employees as individuals and is committed to meeting their unique needs and preferences.

          5. Consider Total Compensation Packages

            Total compensation packages should provide a balanced mix of financial and non-financial rewards. Benefits like health insurance, retirement plans, and wellness programs contribute to employees’ overall well-being and can enhance job satisfaction.

            Moreover, non-monetary perks such as flexible work hours, paid time off, and remote options can greatly impact employee morale and create a more supportive and attractive work environment.

            6. Recognize and Appreciate

              This may be underrated but consider introducing recognition programs that showcase individual and team achievements. This might involve giving awards, praising accomplishments during meetings, or featuring them in company communications. Publicly acknowledging achievements reinforces a culture of appreciation and encourages employees to keep up their good work.

              Personalized gestures of gratitude, like thank-you notes or small gifts, can also make employees feel valued on a personal level. Consistent recognition of hard work and success cultivates a positive and motivating workplace atmosphere, which helps with retention.

              7. Continuously Improve Your Strategies

                Regularly checking the effectiveness of compensation strategies and being open to making changes when necessary is crucial for long-term success. Employee needs and market conditions can shift, so it’s important to stay flexible and responsive. Using measures like turnover rates, employee satisfaction surveys, and performance data can help gauge how well compensation strategies are working and pinpoint areas for improvement.

                Continuous feedback from employees is essential for understanding their changing needs and preferences. Regular surveys or focus groups can give valuable insights into what employees value most and how compensation strategies can be bettered. This feedback loop ensures the company stays in tune with its employees’ needs and can adjust its compensation approach promptly.

                Staying updated on industry trends and market standards is also important for maintaining competitive compensation packages. Regularly reviewing and updating compensation strategies based on external data ensures the company remains an attractive employer.

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                References

                1. “PwC’s 2023 Employee Financial Wellness Survey” PwC, 2023, www.pwc.com/us/en/services/consulting/business-transformation/library/employee-financial-wellness-survey.html.
                2. Stolovich, Harold. “Incentives, Motivation And Workplace Performance: Research And Best Practices” Incentive Research Foundation, Accessed 6 June 2024, theirf.org/research_post/incentives-motivation-and-workplace-performance-research-and-best-practices/.
                3. “Will They Stay or Will They Go? The 2019 Compensation Best Practices Report” Payscale, 2019, www.payscale.com/content/report/2019-Compensation-Best-Practices-Report.pdf.

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