Year End Bonuses – Are They Right For You?
When times are hard, nonprofit leaders don’t need to think about year-end bonuses. But when you find yourself with positive net income and your staff is asking if they will see a little bit of the upside – you may want to consider bonuses. Here’s how to make a good decision:
How could I justify year-end bonuses?
Year-end bonuses are not appropriate for every nonprofit. But consider whether any of these apply to you:
Year-end bonuses reflect your values. Most nonprofits talk about appreciating staff, the importance of staff retention, the desire to be a great place to work, the expectation that staff will be treated fairly. Year-end bonuses are a great opportunity to walk-the-walk.
Staff actually did more work than planned. The reasons may include unexpected absences or departures, delays in hiring, unplanned program growth, and even—dare I say it—unfortunate management decisions. This may show up as financial “savings” against budgeted compensation lines. But those savings were usually made possible by staff doing more.
Your staff is under-compensated. Future-looking compensation decisions (base salaries and raises) must factor in the risk to organizational sustainability if income falls short of expectations. Staff bear the burden of that risk by receiving less compensation than they would if the nonprofit was certain that it would have that income available ¹. At the end of the year with the benefit of better information, bonuses are an opportunity to adjust those earlier decisions.
Year-end bonuses can relieve pressure for raises in the coming year. When staff know that you are inclined to do what you can for them financially—when income allows you to do so, when you communicate effectively about risks and balancing sustainability with other priorities—they will tend to cut you some slack on salary increases.
Would it be financially responsible to offer bonuses?
To make an informed assessment of your capacity to provide bonuses, you’ll need the following²:
Your anticipated year-end net income. This will be a function of actual net income through the end of October, actual income and estimated expenses in November and projected expenses in December. If you have a stable track record of income coming in during December, you can include that projection too.
Cash on hand. Your net income numbers may include substantial amounts of revenue (pledges, invoiced amounts, etc.) that you have accrued but not actually received. So your capacity will be limited by what’s in your bank account.
Comparison of current year expenses to the current year budget. I’ll discuss more below, but it should matter to you and your Board whether you are proposing to spend budgeted but under-utilized funds or funds beyond what your budget authorizes.
Anticipated cash needs in the coming fiscal year, particularly during the first half of the year.
Your financial reserves.
Keep an eye on the role of restricted income in all of this. It is unlikely to be determinative, but it is information you should have.
Many nonprofits either don’t have good financial information or lack the capacity to assess it. If that’s the case for you, I encourage you to make developing this capacity a priority for the coming year.
What’s a bonus pool?
This is the maximum aggregate amount that you are willing and able to spend on year-end bonuses. It includes all taxes and contributions that you are required to make whenever you pay compensation. Bonus pools normally fall between 2 – 4 % of total annual compensation expense, an amount that correlates to something between one week’s pay and one extra paycheck for each member of staff. The size of your bonus pool will reflect a balance of what you can afford, organizational sustainability and opportunities for greater impact.
How would I structure the bonuses?
Year-end bonuses have enormous potential to foster good will, a sense of commitment to the organization and, yes, even appreciation for you as the leader. So you want to take care not to squander this by structuring in ways that are likely to undermine that potential. Avoid approaches that distinguish based on merit, exclude certain individuals (for example, because they’re on probation or relatively new), or tier bonuses (based on department or longevity). All of these raise the question of who deserves extra money. While you probably have very strong feelings about who deserves, those who are disadvantaged by these views are unlikely to appreciate them. If you’re determined to do so, there can be other times to distinguish staff from one another based on merit or value to the organization. But for most nonprofits those times should be rare—and this certainly isn’t one of them.
The optimal bonus structure provides everyone either:
A percentage of their annual wages or
A fixed dollar amount.
The first approach is consistent with your established system of distribution. More of the benefit will go to those who are valued most in your hierarchy. To the extent that staff are comfortable with that hierarchy, they will probably be fine with bonuses distributed in accordance with it.
Distributing a fixed amount to everyone is inherently more progressive and provides a greater portion of the pie to those who are most likely to experience it as a boon. Lower paid staff are often those experiencing the lowest morale and deepest dissatisfaction with the organization. This can help³.
Either of these options will work well for most organizations (I’ve even seen combined approaches, with ½ percentage, ½ fixed—not sure it was worth the effort, but a nice thought). Either is likely to leave most people feeling that they were treated fairly.
OK, I’m in. How do I make this happen?
You’ll need to engage your HR and Finance leaders or advisors to determine your capacity, bonus pool and structure for distribution. Nail down the timing as early in the month as possible to ensure that the expense will accrue in the current fiscal year. If you utilize a payroll service, they should be able to provide you complete information about the distribution process.
Do I have to ask my Board for permission to do this?
There are two questions here—first about transactional authority and the second about the relationship between ED and Board.
If the expense of the bonus pool clearly falls within the spending authority granted in the budget, it’s likely that the authority to make the decision rests with the Executive Director. If the bonus pool would push compensation expense above the budgeted amount or total expenses are coming in above budget, the situation becomes more ambiguous but normally would require Board approval.
Whether or not you have the authority to decide, your ongoing relationship with your Board requires that you are generally aligned with one another in how best to manage the organization. If the Board would be upset to learn after the fact that you provided the bonuses, then you should make them aware ahead of time. This is often a spot where year-end bonuses are derailed, with EDs not wanting to even raise the issue much less expend political capital. If navigating this is fraught, take that as an indication of the need to develop a better shared understanding of organizational compensation strategy.
Shouldn’t I get the same bonus that I award to the rest of my staff?
Sure, maybe. But this isn’t your call. Only your Board can approve ED compensation. You can request or recommend it, but the Board has to decide. Even assuming they would support it, you should think about this carefully in the context of the benefits you hope to realize. If the bonus is based on percentage of salary, and you happen to have the largest salary, then you would receive the largest bonus. A gesture that was intended for the benefit of your staff may start to look self-serving. Consider not requesting a bonus or requesting one more aligned with amounts being received by the majority of your staff.
What about my management team?
There’s a couple important factors to consider—Are you taking care of them in other ways that do not extend to other staff? Would providing bonuses to management team members require you to provide less than you’d prefer to the rest of the staff? Again, consider in light of your objectives.
The objectivity of the management team in advising you on bonuses may be limited. They have a conflict if they stand to receive bonuses along with the rest of staff. While you should take their advice with that in mind, they nevertheless have important roles to play. In particular, to the extent you have senior staff responsible for HR and for Finance, you will want to engage them so that your decision will be informed by a thorough understanding of the likely impacts on their respective areas. Your management team might also be able to help you communicate advantageously about your decision.
Am I creating a precedent that’s going to come back to bite me next year if I can’t provide the bonuses again?
Maybe. But that isn’t a particularly good reason not to do something now that your staff will appreciate. You should also keep in mind that there’s no single thing you can do, including these bonuses, that will create the work environment you’re aiming towards. Year-end bonuses are opportunities to build on other practices and strengthen morale. If the bonuses are your most tangible efforts to support your staff, you are likely to have problems well before its time to decide about the next bonus.
You can mitigate the risk of creating inflated expectations by explaining the different factors that led you to awarding the year-end bonus this year. By doing so, you can define the precedent in a way that’s comfortable. Of course, if those factors are present next year and you elect not to award the bonus, folk will have a right to be miffed.
Intellectually, I can see that this is probably a good idea, but I have mixed feelings. Does that make sense?
Absolutely. Few of us don’t have complicated feelings when it comes to giving money to those over whom we wield power. Year-end bonuses can be a minefield of challenging emotional issues relating to money, power, entitlement, risk, gratitude, feel pressured. In particular, it may grate on you to “reward” staff members who you don’t believe deserve it. Understanding your own emotional response to the topic is important, if only to enable you to push this to the side so that you can focus on determining what’s best for your organization. Whatever you decide to do around bonuses, these issues are undoubtedly influencing other choices you’re making, for better and for worse.
Any tips about communicating?
In order to maximize benefit from the bonuses, frame the decision for staff. Some examples of messages that may be both appropriate and helpful in making sure that you accomplish your objectives are:
We value staff and the work that they do.
Thank you for all the work that has been done to make the past year successful.
We understand that (staff) sacrifice financially to work at our organization and when we’re able to mitigate that, we will try to do so.
You can also explain the financial context that made bonuses possible this year. That will help to set appropriate expectations about future years.
A few “don’t”s. Don’t spoil the mood. This isn’t the moment to talk about how daunting the future is and how hard everyone is going to work in the new year. If you do have lingering concerns about rewarding marginal or defective performance, keep these to yourself. Don’t make this about you and your benevolence.
Should I be concerned that my staff won’t really appreciate the bonus and so it’ll be a waste of money?
Because you’re the one making the decision to provide the bonus, there will be a tendency to personalize and to expect folks to express their gratitude to you. That’s totally normal. And wrong. Let’s turn this around. Through the bonus, you’re the one—on behalf of your organization—expressing gratitude. Sure, it’s always nice when someone says “thank you” back when you say “thank you,” but it’s also a little weird. Whether or not you hear from anyone about it, the money won’t be wasted.
I’m sold, but this just isn’t going to happen this year. Do you have any suggestions short of bonuses that can help convey some of these same messages?
Even without the bonuses attached to them, the expression of heartfelt gratitude and appreciation are very meaningful. As crazy as it seems to many nonprofit leaders, your team really cares what you think about them—so tell them.
Organizations that want to provide benefit to staff but can’t afford bonuses can provide some extra time off around the holidays. Depending on your work flow, you may be able to provide a couple days off between Christmas and New Year’s without any negative impacts. You can close early, particularly on the days before Christmas and New Year’s. If neither of those make sense, you can at least provide some food.
The holidays are a time when gestures can take on outsized importance. If you can afford to think about year-end bonuses, then think about it.
¹ Two quick points—
Under-compensation is structural for most nonprofits.
Enabling staff to do mission-oriented work that they find personally meaningful is a powerful mitigating factor for under-compensation.
² To keep it simple, let’s assume your fiscal year-ends December 31.
³You can reasonably pro-rate bonuses for staff who have been working less than, say, six months, without the adverse impact of simply denying them any bonus at all. The issue doesn’t come up with percentages, since the annual earnings of new employees will already be proportional to how long they’ve been employed.