Bonuses vs pay rises: How to reward performance

Following in the footsteps of the financial sector, performance-related bonuses have been a keystone of how tech companies pay (and importantly retain) their staff.

But now social media giant Snap has decided to switch things up – and get rid of performance bonuses, and instead replace them with a potential performance-related pay rise.

According to Business Insider, Snap’s decision is linked with a need to further reduce costs. Despite laying off 20% of its staff in August 2022, the social media company is still struggling financially.

While its revenue for 2022 was up 12% on 2021 (to a total of $4.6 billion), its net loss was $1.4 billion (compared to $488 million the previous year).

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Talking about the 2022 results, CEO Evan Spiegel commented: “We continue to face significant headwinds as we look to accelerate revenue growth, and we are making progress driving improved return on investment for advertisers and innovating to deepen the engagement of our community.”

As a result of this change in rewards, Snap high performers are moving from receiving a up to 40% of their base salary in a bonus, to an annual pay rise of between 5% and 15%. There will also be opportunities for top performances to receive equity grants every quarter – this is in addition to Snap’s existing annual equity grants.

A Snap spokesperson told Insider: “For the median Snap team member these changes deliver an increase in overall compensation, and for consistent top performers represents a significant raise. This new program begins in April, after annual 2022 bonuses are awarded.”

The changes at Snap have not gone down well with employees – many see it as a de facto pay cut, and it just adds to their general frustration, particularly as Snap has called all employees back to the office four days a week.

In this context, UNLEASH was keen to figure out pros and cons, for both the business and employees, of moving from performance bonuses to pay rises – should other companies follow Snap’s example? Is this a good idea in the ongoing ‘Great Resignation’? Here are the views of our experts.

Bonuses or pay rises?

For business and resilience coach Laura Burton, Snap’s decision raises a lot of questions – the math doesn’t seem to add up. If this is about cost cutting, then how can the average employee end up with an increase in overall compensation?

Laura Burton, peak performance coach, Laura H Burton Ltd.

Burton adds that the beauty of bonuses is they enable companies to be agile around their costs, and avoid long-term compensation commitments. “If a company isn’t performing and doesn’t hit a certain target, then a bonus isn’t payable”.

Obviously, a performance-related pay rise is similar, but, rather than being a one off, it is a “permanent increase in costs”, notes Burton.

Gartner HR’s senior principal Tony Guadagni agrees. “Organizations utilize annual bonuses because – when compared with base compensation – they are relatively flexible.

“For instance, a high performing employee might see a bonus of 20% one year, but if there individual performance or the company’s performance dips the next, they can scale that bonus pay-out back to an appropriate level.

Jesse Meschuk, principal HR consultant, Exequity.

“Conversely, base pay increases represent a long-term liability for businesses. Organizations are then locked into that salary level for years to come, with few options to reduce payroll budgets outside of severance”.

Jesse Meschuk, principal HR consultant at Exequity, shares a different view. “Moving away from performance-based bonuses removes some volatility in regard to compensation expenses.

“For example, if an employee would normally receive a $5,000 bonus, but instead receives a $2,500 salary increase – that’s a saving of $2,500 of the company that year”.

The issue with this is that “as salary increases compound on each other, a 5% salary increase, followed by another 5% salary increase is actually a 10.25% increase over that two year period” – thereby costing more than an original 10% bonus.

Monica McCoy, founder and CEO, Monica Motivates.

While employees often enjoy the reward and satisfaction element of bonuses, there are clear positives of performance pay rises, over bonuses, for employees, according to Burton.

“A stable pay rise is a much better option than a bonus. While employees may like a cash injection, a pay rise enables employees to plan their finances”.

As Monica McCoy, CEO and founder of Monica Motivates, puts it: “Bonuses can be fickle”, pay less so.

“What if, having worked hard all year, you suddenly fall ill with your bonus assessment just around the corner? What if you only recently joined the company?”

Pay rises, over bonuses, have benefits for employees’ pension pots, as well as their ability to get a mortgage, as People Management Partners’ Sarah Ropek notes.

“Employees may feel this is more valuable and usable for day-to-day expenses, especially with rising inflation,” adds Meschuk.

Is now the time to rock the boat with compensation?

While a pay rise may be the more stable option for staff, “employees are almost certain to view the shift skeptically,” notes Guadgani.

“Employees are generally wary of changes, especially to their compensation” and when they occur in the context of a looming recession.

“While employees generally prefer base pay increases rather than bonuses, the context of economic uncertainty or reduction in workforce will make it challenging to convince employees compensation changes are in their best interest”, adds Guadgani.

Joe Mull, founder, BossBetter Leadership Academy.

Joe Mull, founder of BossBetter Leadership Academy, agrees. “No matter how they spin it, any time an organization eliminates an established bonus structure, it will be experienced by employees as a pay cut” – this is because these bonuses are “indistinguishable from other parts of total compensation”.

As a result, a move like Snap’s could have “swift and unintended impacts to an employer” – particularly as pay and rewards remains the top driver of talent attraction and retention.

The ‘Great Resignation’ – is ongoing, despite a looming recession, and employers need to be careful not to rock the boat with their current employees.

However, Ropek is clear that employers need to look beyond compensation if they want to retain their talent. “Businesses need to look at their overall proposition…if they want people to stay”.

Basically, sticking with your existing performance-based pay or bonuses system is also not enough to retain your workers.

Sarah Ropek, founder, People Management Partners.

Instead, according to McCoy, “there’s a lot to be said for asking your team members what they’d prefer”, both around compensation and things like flexible work, wellbeing and learning and development, which are also key factors in the ‘Great Resignation‘.

Mull concludes: “At a time when its harder than ever…to find and keep devoted employees, it’s the organizations committing to more generous pay and benefits, along with initiatives that create more manageable workloads and better quality of life, that are winning the war for talent”

Moving beyond performance

Burton believes that the reason why Snap has made this change could be because of “problem with their initial bonus plan design” – maybe it was rewarding the wrong people or it was not actively driving performance.

This opens up a broader conversation about whether compensation – both bonuses and pay – should be linked with performance at all.

“We have this perspective that if we pay for performance, we’ll get performance”, Mercer partner David Wreford tells UNLEASH. But the reality can be the opposite, and performance-focused compensation can incentivize the wrong behavior.

It can push competitive behaviors that mean employees cut corners and undermine their colleagues, in pursuit of their bonus or pay rise.

But is the resulting work actually the best outcome for the business? Was it the best way to get that job done? Did it lead to better relationships with colleagues and external partners?

Another major issue with performance-focused compensation is that “there is no unambiguous, universally held definition of performance, if you talk to ten people in an organization, you will get ten different views,” adds Wreford.

According to Wreford and Mull, what often happens is that biases creep in. This can lead to game playing – those who can talk the talk around performance are the ones who get the bonus or pay rise, not necessarily the person who most deserves it.

David Wreford, partner, Mercer.

Monica Motivates’ McCoy adds there is a race and gender gap in bonuses. “Women are less likely to get them from men, and the gap widens with age. And Black and Hispanic team members are often much less likely to receive strong performance reviews”.

Wreford asks “why would you link your base costs to something that variable?”, and instead suggests that businesses who want to rethink their compensation models, maybe in the context of a recession or more generally, could instead look at different reward models.

There are huge skills gaps in current organizations – maybe paying for skills, and offering pay rises or bonuses based on an employee’s commitment to upskill, grow and progress is a more sustainable approach than figuring out if they are performing or not.

Another option is rethinking rewards and recognition. Peer-to-peer recognition is very powerful, and has the opposite effect of individual performance bonuses or pay rises of motivating employees to work together as a team for the good of the business a whole.

Some food for thought for HR leaders grappling with a looming recession and unsure what actions to take (or avoid) around compensation and rewards.

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