Levy: It's Time to End the Year-End Bonuses

Work bonus
John Lund | Blend Images | Getty Images

The annual office holiday party.

The year-end bonus.

December's workplace traditions can make life particularly challenging when you're the boss. Things can go horribly wrong.

(Read More: Outrageous Holiday Party Behavior )

As for the office party, you're on your own. This is about the year-end bonus. I want to share three secrets every executive should know to make sure that employers, large and small, get the biggest bang from the bonus buck.

Let's start with a clarification of objectives. This isn't a polemic against the holiday bonus. 'Tis the season. If you have the capability and desire to give to employees, feel free. But it's a gift. It doesn't drive performance or change corporate outcomes.

I'm talking about the year-end bonus that's intended to serve strategic objectives, such as retaining the best employees or rewarding behavior for helping the company achieve its goals.

In that context, the best thing that could happen to the 53 percent of U.S. businesses that award holiday bonuses (according to a Challenger, Gray & Christmas 2011 survey) would be a visit from the Ghost of Christmas Future.

As an employee incentive strategy, the year-end bonus is better suited to the 1840's labor pool depicted in A Christmas Carol than the 21st century workplace.

It's time to re-examine the conventional wisdom governing the value of year-end bonuses.

(Read More: Par-ty! Par-ty!Office Holiday Parties Are Back )

Secret #1

Put an End to the Year-End Bonus: It's challenging for management to connect the front-line employee, the department store clerk, the production line worker, customer service agent or airline baggage handler, to overarching company goals and objectives. Holiday bonuses based on company profitability are viewed by front-liners as arbitrary. These employees feel disconnected from the profitability outcome and thus any bonus paid is like a gift from the heavens, not a reward for performance. For these front line employees (often the heart of most large corporations), the year-end bonus doesn't impact behavior. It's symbolic, rather than strategic.

The current generation of employees requires instant gratification for recognition to be impactful, and recognition should be tied to individual behaviors in real-time. Holiday bonuses are too far removed from the positive behaviors that are completed throughout the year to be meaningful – and they don't relate to the actual contributions of the individual employees who are generating the outcomes.

Secret #2

Performance Over Entitlement Traditions: Innovative companies are re-aligning holiday bonus budgets, aligning them with individual performance instead of applying them to the traditional holiday bonus. Instead of a lump sum payment once a year, savvy employers are creating reward and recognition programs that recognize and reward at the time of the behavior. These timely bonuses distinguish between employees based on their individual performance.

There's good reason for the change. Workplace research shows that employees who are recognized throughout the year score higher on employee-satisfaction surveys. Holiday bonuses, conversely, have little bearing on employee satisfaction scores. And employers that have structured, ongoing recognition programs rank higher in Best Places to Work reviews.

Add to this, few employees stay with a company for the holiday bonus – unless they know they are about to receive a significant payout. They may simply wait for the bonus and then leave. Conversely ongoing employee reward and recognition programs have proven to have a positive effect on employee satisfaction and ultimately tenure.

Timely, performance-based incentives strengthen relationships between employees and managers. They speak to our current generation of employees who expect more frequent recognition. Year-around performance-based programs promote behavior that advances the company goals and impact employee perceptions on a significantly more real and frequent basis than annual holiday bonuses.

Secret #3

Make It Meaningful: Electronics, gift cards, travel vouchers and movie passes serve better as rewards than cash because they're indulgences the employee might not otherwise experience. Cash is used to cover the day-to-day realities and responsibilities (mortgage payments, insurance, credit card bills and utilities). When you think back on the gifts you have historically received, do you recall more readily the cash, or, more likely, the tangible gifts? It's simply impossible to make cash any more interesting than it is. Non-cash rewards convey a deeper message.

Here's a secret within a secret that's keenly relevant in our ever-diversifying economy. Women in the workplace have a much higher propensity than men to participate in activities and events associated with employee incentive and recognition programs -- in some cases a 60-40 ratio.

In the end, it's not a question of whether you should reward employees as much as you can. REWARD, REWARD, REWARD. What matters most is that you apply your rewards budget in a manner that most significantly improves performance and productivity, and strengthens employee satisfaction. Everyone's a winner.

(Read More: Lose My Benefits? I'd Rather Go to Jail! )

As CEO of Online Rewards, Michael Levy has been personally involved in the program design for over 100 U.S. and international reward programs for organizations including Fortune 500 global companies and the U.S. government. Online Rewards is a leading provider of incentive and loyalty marketing programs that change behavior. Online Rewards is www.online-rewards.com.