Mar 262012

How should I reward employee performance: a pay increase or a yearly bonus?
Most Mangers choose one of two options.

1) The first is to increase salaries, the benefit of which is that you are rewarding employees in a way that will last beyond the New Year. The standard method is to decide upon a base increase that all employees will get (usually reflecting the current cost of living increase), then create a continuum of increases that mirror performance.

For example all employees get a 2% increase, while good performers get a 4% increase and excellent performers get a 6% increase.

2) The second is to spread your budget between salary increases and performance-based bonuses. First, decide on either a standard pay increase linked to the cost of living increase for the year, or one based on the current market rate for similar roles. Then choose a bonus amount directly related to their performance for that year.

Rewarding performance through an annual pay increase is like the gift that keeps on giving. If employee performance slips the following year you cannot revoke the increase. Nor should you give additional increases if performance improves. Instead the employee will continue to receive the higher salary based on their first year’s performance. Whereas if you have tied bonuses to performance, if employee performance declines so too does their bonus. They would not receive any residual rewards based on their first year’s good performance.

Consider also the difference in hard dollar value. Assume that Fred’s salary in 2012 is $50,000 and that his performance remains constant for the next five years. Your practice allows for a pay / bonus increase of 5% each year. If you tie performance to salary increases and allot the entire 5% each year to an increase in pay it will cost you $16,883 more than if you provided Fred with a 2% salary increase and a 3% bonus each year.

From an employee satisfaction and morale perspective which is the most effective method for Fred?

If you have any questions about employee compensation or would like to review your own compensation structure please don’t hesitate to Cori at or on 604 488 8885.