However good your personal bonus scheme is, there are better ways to earn your employees’ loyalty or hard work.

It’s common for companies to include bonuses as part of an employee’s salary package, i.e. £50k per annum, plus a £5k bonus for hitting certain targets.

This could be the result of a job offer negotiation, i.e. the candidate wanted £55k but it was outside the budget, so they accepted a lower salary with a potential bonus. Or, it could just be a company perk – a means to motivate all staff to go that extra mile.

If you’re currently offering personal bonuses, for whatever reason, I urge you to reconsider.

It sends the wrong message

When you offer money contingent on hitting targets, you’re telling a candidate, “I’m not sure you’re worth the money, so you’re going to need to prove it to me.”

As a result, getting the money they want becomes the primary reason to reach their targets.

Not only are you starting the relationship with distrust, you’re creating an environment where the desire to achieve is driven by personal gain. You’re sending the message that other reasons for achieving – to benefit the company, to support your colleagues, to get a sense of pride – are secondary.

It undermines teamwork

The personal aspect of bonuses doesn’t make sense. If I’m a Project Manager who is measured on delivering projects at a certain margin, I’m going to need the cooperation of others around me to succeed. Why design an incentive scheme that disregards the importance of teamwork?

It’s impossible to implement fairly

Be honest – have you got a system for measuring performance against bonuses? I’ve seen plenty of bonus schemes that amount to little more than smoke and mirrors, where everybody gets theirs without fail.

If you do have a system, putting it into practice is anything but straightforward. There are three possible scenarios:

a) They didn’t meet the targets, but it wasn’t their fault i.e. poor management, others not contributing, unrealistic targets, personal illness.

If it’s not their fault and you don’t pay the bonus – well, that seems unfair. But if you recognise the unfairness and pay it anyway, you’ve basically admitted the whole personal bonus scheme was pointless.

b) They didn’t meet the targets, and it was their fault i.e. not working hard enough, not taking on feedback.

If it is their fault and you don’t pay the bonus – do you keep them employed? You’re telling them (and everyone else), “It’s okay if you underperform, we just won’t pay you as much.”

c) They meet their targets.

Phew. This is the only possible good outcome of the system. But if you have managers and a workplace culture that make this possible, you could have just paid them this much from the start.

Retention bonuses are no better

You don’t want an employee to stay with the company just to get a retention bonus. You want them to work for you because they want to, and you want them to stay because they can deliver what you need.

Sometimes an employee leaves because they’ve outgrown the business, or vice versa. It doesn’t mean their contribution is any less valuable than someone who stayed longer. By the same token, someone who sticks around for longer isn’t necessarily more deserving of a bonus than, say, an employee who helped the business through a short but difficult stage of growth.

What you should be doing instead

You can reap all the supposed benefits of bonuses (motivation, performance, loyalty, etc.) through other, more long-lasting means.

Firstly, pay well from the outset (more than they’d get somewhere else). If you’ve invested in the hiring process, thoroughly assessed the candidate and decided they’re the best person for the job, why squabble over a few thousand?

Once they’ve joined, give them access to good benefits like medical insurance and training budgets. Review all salaries and benefits yearly, and use your workplace culture to drive results by encouraging teamwork, autonomy and innovation.

Develop your staff. The biggest gift you can give your direct report is to prepare them for their next job. Whether that’s developing their core skills, or giving them a coach, or providing them with opportunities to shadow you and stretch themselves. Giving someone the ability to make more money in the future is more valuable than throwing them a few extra k at the end of the year. Instead of giving them e.g. £5K at the end of the year, offer to give them £5K worth of coaching – they’ll not only feel valued and motivated but you’ll also benefit.

Make performance management an ongoing activity. Set clear goals, measure progress regularly, provide feedback on how to improve, communicate the importance of meeting and exceeding targets. To do this, you need to have talented and experienced managers. Never compromise on this. People will join, stay and leave because of their manager, and their performance will be directly linked to the manager’s efforts.

The only kind of bonus I’ve toyed with is a collective one, i.e. if the company hits an annual target of £10m ARR, then everyone (in recognition of the fact that everyone contributes to success) gets a fixed bonus. Even then, there are flaws in the system. What if someone just joined and didn’t really contribute? What if someone who contributed left before judgement day? You’re better off paying everyone really well (and doing all that other stuff), then throwing awesome parties when certain milestones are reached.