As we near the end of 2023 and enter the performance and compensation review period for many organizations, we’re still in uncertain financial times:
Where is the economy headed? Is a full recession still on our horizon? How will this affect our business?
And also: Our employees have worked hard this year, how do we reward them? How do we approach bonuses, when the targets have changed so drastically from the past couple of years, and inflation remains high?
Here are four strategies we discuss with clients on how to approach the annual raise and bonus conversation this year. Disclaimer: there is no “right” answer. Each company will need to find what works for them. The key here is open communication and transparency.
1. Pay-for-Performance (and Retention)
Just because major layoffs have made the news and levels of uncertainty are high generally, companies with indispensable talent should still consider maintaining the raises and bonuses on par with previous years. Especially for positions that remain in high demand or for really exceptional employees, rewarding and retaining talent remains critical.
If an employee isn’t feeling valued or connected, they’re not going to stay with a company long-term. Although the Great Resignation has slowed significantly, we’re still seeing candidates seeking opportunities that align better with their career goals and values. Additionally, the number of open roles has begun to swing up again, which means there are more options available to employees seeking new opportunities. Although we’re in the business of hiring, we are deeply invested in the placements we make being great long-term fits — bonuses and other rewards are major contributors to retention, to keep employees on your team.
2. Smaller Profits; Smaller Targets
Depending on how the company’s year went, some organizations are trying to split the difference and offer their best employees a one-time bonus versus a raise. Payroll only takes a hit for one month, which allows the company to be nimbler moving forward while still rewarding employees for their dedication and adaptability during an uncertain time.
Or, if the size of a guaranteed or performance-based bonus has been affected by the economy (which is out of the employee’s control), some companies want to meet in the middle and still provide a bonus, although smaller than what the employee may have anticipated in a different year.
We’ve also talked to clients that are giving partial cost-of-living raises to let employees know they are still valued, and that the size of the increase will look different in the future.
3. Delay Payday
Companies that are starting to see an uptick in business, but want to stabilize resources for a few months or quarters, are pushing out their bonus and raise cycle into 2024.
This lets employees know that they are still valued and can expect a raise in the future, depending on the economy and the company’s performance. It also takes some pressure off payroll for the immediate future while helping with retention, because employees want to receive their bonus before considering a new role.
This is not the strategy to use every year, but it can be a stop-gap solution to a challenging year. It’s crucial to give employees a firm timeline for a potential raise or bonus, and to honor that timeline to the day. Consistent communication, if the raise or bonus has the potential to change based on company performance, is essential.
4. Call a Mulligan for 2024
Some clients we’ve talked to are not increasing salaries or providing bonuses this year. These companies plan to reward employees after they have more certainty around their economic future.
Companies thinking of taking this approach should have a frank conversation with employees about predictions for the next couple of months or year (e.g., “We know how hard you’ve worked this year and want to be transparent about how we’re doing as a company”).
Do not point to other businesses as the reason for not providing increases or bonuses. Being transparent about finances and giving employees forward-thinking expectations helps them buy into the larger company vision, even when compensation is the main way a company shows an employee they are valued.
According to Statista’s projected monthly probability of a recession in the United States, we’re still tracking towards a recession in the early half of 2024.
The impact will be industry-specific and continue to look different for every company.
Companies need to balance employee appreciation and expectations, retention, budget limitations, and future predictions when choosing how to handle raises and bonuses this year. The key to a successful compensation review is in how the decision is communicated to employees.