Can you keep employees motivated and compensated without annual salary increases?
By Reed Richardson

With workers harder to come by, salaries seem destined to keep rising. But one way to offset this expense is to consider opening up more of your employees to performance bonuses rather than simply handing out cost-of-living increases every year.

This trend is increasingly popular across the business spectrum. A Hewitt Associates study from September found that 80% of U.S. companies now offer some kind of bonus plan to their workers. By setting aggressive sales or productivity targets to trigger the bonuses, the extra money paid out often provides a much greater return on investment than standard merit raises. Plus, it strengthens the psychological link in employees’ minds between increased performance and increased pay.


Still, there are pitfalls to shifting employees from a strict salary-based pay system to one that includes bonuses. Initially, many workers can feel demoralized and see the move as a ploy to reduce overhead, particularly if the bonus’s goals appear unreachable or arbitrary. Experts suggest continuing to offer a raise, albeit a more modest one, along with bonuses to allay employees fears that their income won’t keep up with inflation. Then, over time, it might be appropriate to move some employees to a base salary plus periodic performance bonuses.

Small businesses tight on cash, however, might consider tying employee bonuses to the overall success of the company rather than to individual performance. Mark Cuban, who turned two start-up companies into billion-dollar enterprises, says he always approached bonuses this way. “If the company is making money—actually cash flow positive— then I’m always open to paying bonuses.” But, he notes that if the company is struggling or not yet profitable, then he curtails payouts as a way to drive home the idea that each employee’s success is tied to the success of the overall business. In other words, Cuban says, “When the company makes money, you will make money.”

Reed Richardson is the Managing Editor for Business 24/7 Magazine.