Bonuses: A great recognition tool to increase employee retention
I had a boss who defined People-First Leadership. He took time to listen to employees. He understood that the work we did in the hotel could be backbreaking. He understood the power of “Thank you”. He also understood the power of monetary recognition. Whether it was a spot bonus or part of a long-term incentive plan, he knew the impact it would have. I had been working in the hotel for only a few months and was working 20 hour shifts, running on caffeine and little sleep. One afternoon, my boss came to my office, asked me to take a walk with him, and as we walked the grounds, he handed me an envelope and said, “Thank you for all you’ve been doing to keep your team in high spirits during this busy season.” It wasn’t a huge bonus, but it felt like someone had seen the effort I’d been making to keep the department humming along.
I also worked with a manager who would give out gift cards at “random” to employees. Really, he just called out his favorite employees and gave them a gift card to their favorite restaurants and shops. These spot bonuses reeked of favoritism and seemed unfair because they were so subjective; I couldn’t earn it because I wasn’t one of his favorites. (Note about gift cards: they’re taxable income to run through payroll).
That experience taught me something many leaders fail to learn. A bonus isn’t just a financial transaction. Used well, it reinforces value and can motivate employees. If used incorrectly or unfairly, it can sow the seeds of discourse and create rifts within teams.
Compliance Basics Leaders Can’t Ignore
Before diving into strategy, a few fundamentals to be aware of:
Discretionary vs. Non-Discretionary Bonuses: Most bonuses must be included in overtime calculations under the FLSA. Many employers miss this and find themselves out of compliance.
Tax Implications: Bonuses are taxable income. They must run through payroll
Written Policies: Bonus structure, like pay structure, must be documented. Without a clear policy, even well-intended bonuses can look like favoritism or discrimination.
Getting compliance right protects both the company and the integrity of the bonus program.
Types of Bonuses
· Monetary: Cash rewards tied to performance or revenue/profit targets
· Non-Monetary: Things like extra PTO, a holiday turkey, or a unique experience (think award trips for reaching sales goals)
· Short-term and long-term incentive plans: programs that tie rewards to measure outcomes like sales quotas or customer satisfaction scores
· Spot Awards: instant recognition for going above and beyond
· Discretionary Bonuses: awards given at management discretion for excellent effort and work
· Project Bonuses: bonuses awarded at the successful completion of a major project
· Profit Sharing: employees share in company profits, thus creating a sense of ownership
Common Pitfalls of Bonus Programs
Too often, bonuses are treated as a quick fix for culture issues or turnover problems. When the real problem is workload, communication, or leadership trust, a bonus won’t fix it.
Leaders also run into trouble when:
Bonuses are inconsistent or unclear
Overly complicated metrics
Metrics that change mid-year
Employees don’t know what they’re being measured on
Bonuses feel transactional without human recognition
A bonus without clear criteria feels random. A bonus without appreciation feels hollow.
When Bonuses Work Well
Thoughtful bonus programs can:
Motivate the right behaviors
Reinforce company values
Reward meaningful performance
Foster a sense of shared success
Strengthen retention by showing employees their contributions matter
But bonuses shouldn’t stand alone. Specific, timely, genuine recognition transforms financial reward into emotional impact.
Pairing Bonuses with Real Recognition
Employees want to feel valued as people, not line items. Leaders can strengthen any bonus program by adding:
Verbal acknowledgment
Handwritten notes
Team celebrations
Peer recognition opportunities
Manager training on everyday appreciation
When recognition is woven into daily culture, bonuses become a meaningful extension of the culture.
A Better Approach for Small Businesses
Start simple:
Define the purpose of your bonus program
Solicit feedback from employees about what they want in a bonus program
Set clear eligibility and criteria
Communicate expectations upfront
Deliver bonuses with genuine appreciation
Review the program annually to ensure fairness
When bonuses are intentional, compliant, and paired with real recognition, they become what they were intended to become, a sincere “thank you” for hard work.
Compliance is crucial. Bonus plans must follow the rules:
Fair Labor Standards Act (FLSA)
Employee Retirement Income Security Act (ERISA)
IRS requirements
Equal Pay Act
Reach out today to learn more about compensation and benefits benchmarking and to review bonus structures for your team:
