We often hear from employers looking for flexible ways to reward employees without committing to long-term payroll increases:
“Can I offer bonuses instead of raises?”
Technically, yes—but it’s worth stepping back and asking whether the bonus actually supports your long-term goals. Many employees don’t view bonuses as part of their core pay. They see them as “extra”—which means if you’re using bonuses in place of raises, your employees may feel like their compensation isn’t growing.
Bonuses are a great tool for recognizing short-term achievements or sharing company success. They also help you avoid increasing fixed payroll costs. But relying on them as a primary reward strategy can backfire:
- Employee Perception: Raises offer financial stability and long-term growth. Bonuses feel temporary. Most employees don’t plan their budgets around an unpredictable payout.
- Retention Risk: Substituting raises with bonuses over time can leave employees feeling underpaid and unappreciated—leading them to seek employment elsewhere.
- Compliance Considerations: For non-exempt (hourly) employees, bonuses tied to performance or promised payouts must be factored into overtime pay calculations under the Fair Labor Standards Act (FLSA). These bonuses also impact the hourly rate you need to pay for sick time calculations.
- Tax Timing: Bonuses are taxed differently and often feel smaller due to higher withholding at payout, which can create frustration.
Bottom line: Be sure you’re working from a clear compensation strategy. Are you trying to reward individual performance? Share company success? Retain top performers? A well-structured plan should include both base pay increases and bonuses, aligned to your business goals and employee expectations.
Bonuses should supplement—not replace—raises when it comes to long-term employee retention and satisfaction.
Want to ensure your workforce is properly compensated and motivated? Reach out