2023 Annual Bonuses, Financial Payouts, And Year-End Gifts: The Key Role Of Rewards

As the holiday season approaches and 2023 winds to a close, many businesses are planning their year-end gifts, annual bonuses, and financial payouts to employees. While the financial rewards for employees are important, it is equally crucial to consider the role rewards can play in building a strong culture and reinforcing brand values.

Year-end rewards strategies can go a long way in showing employee appreciation and motivating employees to start 2024 strong. However, your business must strategically structure these bonuses and compensation programs to adequately motivate employees, avoid tax and legal obligations, and fit within your bottom line. 

Discover the various strategies employed and understand how employee rewards align with these programs.

Ultimately, an effective employee reward strategy fosters an engaged workforce and a culture devoted to company success. When implemented correctly, rewards reinforce company values and unite everyone towards shared goals. 

Employee bonus programs 

Employee bonuses are valuable tools for recognizing employee contributions and rewarding a year of hard work and dedication to the company.

Businesses offer several types of employee bonuses, and the ones you offer will depend on your goals for the bonus program. These are some of the most common bonus programs and examples of when your business may want to offer them: 

• Annual bonuses encourage employee retention, incentivize performance throughout the year, and motivate employees to continue working hard for the business. 
• Sign-on bonuses present a competitive offer to job candidates, bridge a gap between desired vs. provided compensation, and pay out a candidate’s performance bonus from a previous position.
• Spot or one-time bonuses reward exceptional performance, recognize specific employee achievements, and set a precedent for other employees. 
• Retention or milestone bonuses reward employee retention and long-term commitment to the company. 

As you consider year-end payouts for employees, think of the type of bonus that would best accomplish your goals. Answer the following questions as part of your strategizing: 

1. Are employees anticipating a bonus, or would the bonus surprise them? 
2. Will different employees receive different amounts of money? How will you calculate the bonus amount for each employee? 
3. Will bonuses be based on performance? How will you measure employee performance? Do employees know their performance is being measured in this way? 
4. When will you pay out the bonus — at the end of the year, before or after the holidays, or on a specific date? Will employees know when they can expect to receive the bonus? 

Failing to prepare for a bonus program properly could frustrate employees or achieve the opposite of your desired goals. 

Finance payouts

Providing employees with payouts, or percentages of the company’s revenue or stocks, is another effective way to encourage retention and recognize hard work. Employee stock ownership plans (ESOPs) are some of the most common ways to give employees ownership interest in a company. 

ESOPs are benefit plans or rewards systems that allow employees to share in the company’s success. Higher revenue equals bigger stock payouts for employees. As a result, employees feel motivated to improve performance throughout the year, knowing their work will directly translate into better end-of-year payout. 

But ESOPs also directly benefit your company, as better employee performance means higher revenue for your company — your bottom line. These mutually beneficial plans are highly popular within employee recognition programs and compensation packages. 

Like any employee benefit or investment opportunity, structuring your finance payout correctly is crucial to its legal and tax compliance. 

Tax and Legal Considerations for Finance Payouts 

Each employee stock option plan has different requirements for taxation, so you’ll want to ensure you thoroughly understand a plan before offering it to employees. 

For ESOPs, your company must pay taxes when you exercise or sell stock options. The type of stock option you sell impacts the amount of taxes you pay. 

• For non-qualified stock options (NQSOs), the IRS taxes options as regular income. Short-term capital gains taxes apply to shares sold within one year of the exercise date, while long-term capital gains taxes apply to shares sold after one year. 
• For incentive stock options (ISOs) given to executives, no special tax treatment applies. However, differences between the stock’s market value and exercise price could require an alternative minimum tax (AMT) payment. 

Your business should also understand the legal considerations of offering stocks to employees. Providing them on a discretionary basis rather than as a contractual obligation may help you avoid legal issues. 

Year-end gifts

End-of-year gifts are distinct from employee bonuses in that they do not necessarily reflect employee performance. Instead, your company provides gifts to every employee based on criteria such as:

• The company’s overall revenue for the year
• Each employee’s salary (in the form of a percentage gift)
• A predetermined monetary amount (such as $1,000 to every employee) 

You may decide to give end-of-year gifts to employees for any of the following reasons: 

• To show appreciation for making it through a rough patch in the company’s fabric
• To thank employees for their general hard work and dedication to the company
• To encourage retention, especially in periods in which understaffing or quitting is an issue
• To encourage a sense of loyalty to the company, potentially leading to improved performance 

End-of-year gifts can be monetary as a lump sum bonus, but you can also consider offering non-monetary gifts. A few ideas include:

• Experiential rewards: Events or experiences outside of the workplace, such as travel opportunities, tickets to an athletic event, or zoo or amusement park memberships
• Flexible working opportunities: The opportunity for employees to work from home or change their work hours on certain days and enjoy more control over their schedules
• Fringe benefits: Financial perks outside of direct compensation, such as tuition assistance, employee discounts, childcare assistance, or wellness programs 

Keep in mind the difference between employee gifts and bribery. While you may decide to give gifts to encourage retention or performance, employees should not feel forced or compelled to act a certain way because of the gifts you give them. They should have no strings attached, so to speak. Maintaining this mindset can help ensure a positive reception of the gifts you provide. 

The key role of rewards in employee recognition, retention, and motivation 

Employee rewards systems are key to maintaining a satisfied, motivated workforce. As a business owner, you know your workforce largely contributes to — if not completely controls — your company’s success and profitability. 

Reward programs play numerous roles within your business:

• Incentivize performance: Employees may feel more motivated to meet performance goals when they know they will receive a reward for doing so. 
• Acknowledge employee efforts: Rewards help employees feel appreciated, internally motivating them to continue working hard. 
• Stay competitive with other employers: Your company should offer bonuses that align or outperform competitors, motivating employees to stay with your company and incentivizing job candidates. 
• Showcase your company values: Rewards show that your business cares about employee satisfaction and is not just concerned with maintaining your bottom line. 

Whether your company offers bonuses, finance payments, end-of-year gifts, or a combination of the three, keeping your goals for the reward program in mind can ensure you shape your compensation accordingly. Proper rewards management is even more important than the idea of offering rewards in the first place, as failing to structure rewards properly could make them more expensive than they are worth. 

Bonus: 2024 budgeting and expectations

As your company looks into 2024 and beyond, consider how future budget constraints and financial considerations will impact your rewards systems. To run a successful year-end employee rewards program, you would need to allocate a budget that takes into account various factors. 

These may include the number of employees, the desired level of rewards, and any financial considerations specific to your company. 

For example, many companies are tightening salary budgets in 2024 in anticipation of the expected recession instead of offering quarterly or year-end bonuses to show appreciation to employees

It is important to carefully plan and allocate funds to ensure that the rewards program adequately shows appreciation to employees while also considering any budget constraints or anticipated economic conditions. By carefully managing your budget and making strategic decisions, you can create a rewarding and impactful year-end employee rewards program.