Your small business can’t operate successfully without the help of your employees, which is why it’s important to maintain a happy, focused workforce. Of course, giving your hardworking employees a bonus or raise can decrease turnover and boost staff morale, but these monetary rewards can easily take a toll on your business’ bottom line. Before you decide on handing out bonuses, raises, or a mixture of both, consider the advantages and disadvantages of both of these options.

What are the Advantages and Disadvantages of Raises?

A percentage-based pay raise helps your employees keep up with the ever-rising costs of living and, in some cases, widens the pay gap between your long-term and entry-level workers.

Your business may choose to give raises to all workers once a year. On the other hand, you could also incentivize employees who perform well a higher hourly rate or provide different raises depending on whether an employee is paid hourly or is on salary.

While raises have the benefit of lower up-front costs, they represent a permanent increase in payroll expenses. So, before giving workers a raise, be sure to plan ahead to keep cashflow on an even keel. If your small business expects rising or at least predictable profits, raises can work wonders, but if your company runs on a tighter margin, raises can cause pain points in the long-term.

What are the Advantages and Disadvantages of Bonuses?

If your small business has variable profit margins, you can sometimes absorb costs stemming from one-time bonuses better than a permanent raise in worker pay.

The advantage of this compensation method comes down to your company’s ability to factor in the one-time cost based on previous profits while ensuring you don’t set yourself up for cash flow issues in the future. Also, should profits drop, your business can easily suspend or withhold bonuses until a later time, as workers don’t necessarily rely on this money to cover their day-to-day expenses.

Additionally, bonuses make sense when you wish to provide stellar employees with extra compensation to keep them happy.

Balancing Employee Compensation Options

To balance your profit with the needs of your employees, compensation options that combine raises with bonuses usually make sense. Your small business could provide a nominal across-the-board raise for all workers based on a single-digit percentage of their current pay but then give additional incentive bonuses to workers who meet objective performance metrics.

This balancing act works to keep employee morale high, while also ensuring that top-notch employees get the recognition and special compensation they deserve. While raises typically keep hourly pay standards at or above typical compensation for your industry, you can always negotiate bonuses as part of larger expected packages or as a type of “thank you” for reaching milestones or incurring a milestone number of years with your company.

Additional Compensation Options to Consider

While raises and bonuses are the main compensation for most workers, you can also use unique methods to achieve the same goal of keeping employee morale high. Some alternate compensation options to consider include profit-sharing plans, stock options, extra contributions to worker retirement accounts, and extra vacation days or holidays. If you have employees that always go above and beyond, provide spot recognition, such as tickets to local events, gift cards, and movie passes.

Your small business depends on your workers to move forward, so it makes sense to keep those employees happy and comfortable. Regular raises and bonuses ensure morale stays high, excellence gets rewarded, and workers stay put for the long haul.