There is a large degree of psychology behind giving bonuses to employees, and these days it seems to be a hot button. I talked in my last blogabout first reader reaction to mya December column for Investment Advisor where I wrote about bonuses, and to date I've received more than a hundred responses including many questions about giving employee bonuses. One of the recurring issues revolve around advisor/owners asking about designating various uses for employee bonuses: to be put toward their medical insurance contributions, for example, or into their 401(k)s, or other benefits that may give the employee a tax advantage.
I want to be very clear about this, because it's a very important point: bonuses to employees should never be earmarked for any specific purpose at the suggestion of the employer.
In fact, in my experience and conducting research around giving bonuses, I have seen a massive decrease in motivation when the employer suggests that employees might consider using their bonuses for other purposes. I have seen the outcomes of this, and it's a big mistake.
Here's why: employee bonuses, whether they are revenue based or any other kind, are meant to reward employees for their performance. By giving employees a bonus, you are sending the message that you recognize and appreciate their efforts toward the success of your business. By doing so, you are boosting their morale, and motivating them to find ways to make even greater contributions to the firm.
Everybody likes their hard work to be recognized—when it is, they feel good about themselves and their jobs.
But when an owner gives a bonus and then starts talking about what their employees should do with their bonuses, you undermine all that. You can come off as appearing to have an ulterior motive, and that you're not really giving them the money. Instead, it appears you're going to actually use it to your benefit or the firm's. Even if you manage to avoid that appearance, you're still telling them what to do with "their" money: and nobody likes to be told what to do with their money. It makes them feel as if it's not really theirs.
I understand that there can be tax advantages for the employees if they contribute their bonuses into a pension plan or use it to pay for their medical insurance—and as a financial advisor, you're just doing them a favor by pointing these things out. But you have to understand that your employees are not your clients. While you can greatly help them out with this financial advice, from a motivational/performance standpoint, it's always just better to say nothing.
Trust me on this: As owners of small businesses, you're going to have to put this into the category of conversations that you just can't have, like telling your wife she looks fat in her favorite pants: Simply raising the issue is going to do a lot more harm than good.
On the flip side, in my consulting work we get requests from employees in firms asking if they can apply all or a portion of their bonuses to benefits that give them a tax advantage. Of course we will do this for them because it benefits them, but the key is never to suggest it. We let the employees suggest it, and if they don't, then we pay the bonus and follow federal and state withholding laws.
There is an amazing transformation in motivation and performance when employees get a privilege, with no strings attached, and then have their own voice in what to do with it. The point is that when paying out bonuses, take off your financial planner hat and put on your employer hat, and let your employees decide what to do with their money.
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