4 Major Downsides Of The Annual Bonus

Everyone loves year-end bonuses. But are they more over-done tradition than useful motivation?

4 Major Downsides Of The Annual Bonus
[US dollar bills: cocozero via Shutterstock]

Managers struggle to keep employees engaged throughout the year, and hearing the hype about recognition programs, they often default to awarding annual bonuses.


But are these perks enough to keep employees engaged year-round? Are year-end bonuses timely enough to boost motivation consistently?

The short answer is no. Here are some major downfalls of the year-end bonus and why you should ditch it for a more modern rewards systems that actually works:

1. Annual Bonuses Aren’t Timely

This generation’s growing need for instant gratification virtually means any wait for a reward automatically makes the reward feel less relevant.

The Pew Research Center recently conducted a study to predict the millennial impact of living a hyperconnected life. Results showed that such networked living will drive a thirst for instant gratification and lack of patience.

Because of this, the younger workforce will be less likely to respond to delayed rewards in the workplace, making year-end bonuses feel unfulfilling. More alarmingly, you’ve got a bunch of money going out at the end of the year having minimal impact on performance.

Let’s say an employee stays late every night one week in April to save a major project. As a manager, you want to recognize his efforts, so maybe you thank him and make a note of that for when the time comes for year-end bonuses. The problem is, by December, that project might be a vague memory for the employee, and while he might be happy to receive a hearty check, the significance in reward for the specific event is lost.


A better solution would have been to reward the employee with a bonus on the spot, so he could instantly feel the appreciation and relate it to recent hard work.

2. Bonuses Aren’t Continuous

Monetary recognition is more impactful if it occurs on a consistent, regular basis, and that means more than once a year. If bonuses are meant to drive motivation and improve morale, it seems foolish to restrict this push to only once a year. That would mean a burst in productivity during bonus time, and potentially low to mediocre productivity for the rest of the year.

Psychologists in Britain recently conducted a study on how rewards systems affect behavior in schools. They found that learning and motivation are hindered when good behavior is not rewarded consistently. This is because competition and incompetence are fostered in an environment where rewards are not consistent and bad habits form easily.

Constant rewards drive constant responses, and offering smaller bonuses as an ongoing reward process helps maintain high levels of motivation throughout the year.

3. They’re Too Centralized

This is a major downfall of traditional rewards systems in a couple of ways.

  • Employees care more about what their peers think than what management thinks.
  • Employees spend more time working directly with each other than management.

Your employees care a lot about what their peers think of them. If there is any question of that, just look at social media. Feeling accepted as part of the group is extremely important in the workplace, and peers control that more than anything. Peers work closely with each other, so they generally have a more accurate understanding of the best performers and the weakest links. That’s why peer-to-peer recognition in companies is so powerful.


A new study by researchers in The Netherlands even shows peer assessments are a powerful tool in impacting performance. It’s not that rewards systems run by management aren’t somewhat effective, but peer-based recognition could be so much more.

4. They Don’t Allow For Employee Participation

Typically handled by upper management, the year-end bonus rarely involves employees or peer recognition. One way to keep employees engaged in the workplace is to let them have a say in how others’ work affects them.

A new Hindawi study measured the effects of engaging trainees by assessing peer performance. The study found that trainees who were able to assess peer performance were more satisfied with the training than those who did not. If assessing peer performance impacts satisfaction in training, imagine what it could do in the workplace.

In order for companies to keep up with rewards systems that actually work, they’re going to have to keep an eye on the direction social media and mobile technology is taking us and follow suit. Year-end bonuses no longer work in today’s workforce. In their place, we should implement more modern solutions enabling small, timely and consistent bonuses with peer-to-peer recognition. Soon, recognition could be as easy as updating a Facebook status.

Raphael Crawford-Marks is the cofounder & CEO of Bonusly, a web platform that helps companies reward and motivate employees by using peer-to-peer bonuses. Connect with Raphael and Bonusly on Twitter, LinkedIn, and Facebook.