How to hand out Christmas bonuses

'Tis the season to be jolly and give your staff a reward for all the hard work they've done during the year. But if you're playing Santa, who should get a bonus and what should they get? Here's a crash course.

by Alexander Garrett
Last Updated: 16 Dec 2013

What is it? The Christmas bonus is seldom the vehicle for rewarding individual performance, says Chris Charman, a director in the rewards practice at consultants Towers Watson. 'It's usually given for historic reasons and it's tokenistic compared with the performance bonus, which is the big one.' If Christmas is the end of your financial year, you could make it performance-related - but be prepared to make some people unhappy.

Be clear. If you aren't offering the same thing to everyone, make sure you communicate clearly who gets what and why. Differentiating will leave some happy - and others fuming.

Manage expectations. When you haven't had a good year, it's tempting to axe the Xmas handout, but be wary. If the bonus is designed as a thank-you, taking it away is a brilliant way to destroy goodwill. 'Behavioural economics teaches that people perceive the loss of something twice as much as they perceive its gain,' points out Charman. Don't let people mentally spend their Christmas bonus then discover they aren't getting it.

Bonuses aren't just for Christmas. The festive season is a great time to thank people for their contribution, but to motivate people it's a good idea to spread rewards throughout the year. Colin Hodgson, sales director of incentives group Edenred, says: 'Keeping back a portion of the Christmas reward for the new year as a surprise has the impact of picking employees up at a time when they face the January blues and have empty bank accounts.'

Think tax. 'You don't have to report anything to HM Revenue & Customs or pay tax and National Insurance if you give goods that can't be resold for cash to employees who earn less than £8,500 a year,' points out HMRC's website. Cash payments added to payroll incur NI as well as income tax, while 'trivial benefits' such as a bottle or a bunch of flowers are exempt.

Consider alternatives. A hamper can seem more exciting than its monetary equivalent. 'Cash is probably the worst way to reward people,' argues Hodgson. 'The amount given gets taxed and reduced before employees receive it, it gets lost in the pay packet with no recollection of how it is spent, and it rarely lives up to expectations.' Personalised gift vouchers and cards let people make their own choices and are more memorable, he says.

Be culturally aware. Few non-Christians are going to complain at getting extra cash, but in a multicultural workplace don't push angels and donkeys at those of different faiths.

Do say: 'Please accept this thank-you for all your hard work during the year.'

Don't say: 'This year I'm only handing out the Yuletide cheer to a few people who I think deserve it.'

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