Employee bonuses: Strategic lever or wasted investment?

‘Total rewards’ gives an array of different tools to use to recognise and reward employees, as well as to drive behaviours towards commercial priorities – from salary increases to equity refreshers to performance bonuses to recognition programmes to L&D budgets.

Employee bonuses are one of the most debated tools in the mix. 

For some companies, bonuses are an essential component of their compensation strategy. For others they’re seen as ineffective at best and potentially counterproductive at worst.

This diversity of approaches raises the question: what makes bonuses work in some contexts but not others?

We spoke with three reward experts to get their perspectives: Anastasia Efremova, Global Director of Total Reward at Semrush, Figen Zaim, Founder and Managing Consultant at Olivier Reward Consulting, and Vaso Parisinou, Chief People Officer at Ravio.

The benefits: When employee bonuses work

The range of different types of employee bonuses means that, when asking whether bonuses are effective, the answer inevitably depends on the bonus and the context of the company using it. 

For instance, Anastasia Efremova, Global Director of Rewards at Semrush, emphasises that for mature companies, structured bonus programmes are often a cornerstone of the compensation strategy.

"I strongly believe in having bonuses for at least senior and middle management in mature companies," says Anastasia Efremova. "It creates alignment between business goals and leadership direction."

This alignment is crucial – when designed correctly, bonuses can be the compensation lever that helps connect individual efforts to broader company objectives. 

Figen Zaim highlights that connective power can foster a sense of ownership and shared purpose that salary alone may not provide.

"Bonuses can help even the most junior employee in an organisation to connect the dots between their output, their manager's output, and the company's success overall,” she says, “which has the added benefit of building commercial thinking across all roles."

It’s also typically accepted that some form of bonus structure is a requirement for sales teams today, as an effective mechanism for incentivising teams to meet targets on new deals or upsells.

Vaso Parisinou has found particular value in unexpected discretionary bonuses as a way to ‘surprise and delight’ employees. The emotional impact of being recognised for extraordinary work often extends beyond the financial value of the bonus itself.

"I've found bonuses to be particularly effective when they're not a given part of the total compensation package,” she says, “there’s a 'surprise and delight' element that can be a great way to recognise employees for herculean efforts on specific projects."

Aside from the performance benefits, bonuses can also offer financial flexibility for the organisation too.

"Bonuses can be self-funding if you design them well," Figen points out. If employees are rewarded for contributing to increased revenue, then the bonus payout will more than pay for itself within the positive business outcomes. Plus, instead of permanently increasing fixed costs through base salary increases, bonuses offer a way to make a one-off reward.

This can be particularly important for startups who don’t have endless compensation budgets or sophisticated Rewards structures – especially in terms of avoiding pay equity issues.

"In startups we should always be looking at creative Rewards approaches," explains Figen.

"We don't want to be relying too much on base salary or equity increases to recognise employee contributions. If you just give a bit more equity and a bit more base salary then it might solve the problem for now, but cause negative impacts later on in terms of pay equity across the team."

The potential pitfalls: When bonus plans falter

Despite these advantages, bonus programmes aren't without their challenges.

Even our experts who advocate for bonuses acknowledge their limitations and potential drawbacks in certain circumstances.

Vaso Parisinou's personal experience, for instance, highlights a critical point about motivation. "I've previously had bonuses aligned to specific objectives that I had to deliver as a People Leader. And don't get me wrong, it's nice to receive. But I often thought 'this isn't a driver' – if I didn't have this, I would work just as hard. For me personally, at that stage of my life, it wasn't driving additional effort."

This touches on a fundamental question: do extrinsic rewards like bonuses genuinely drive intrinsic motivation, or could they potentially undermine it? The answer isn't straightforward. 

Whilst it’s clear that bonuses do work in some scenarios, a growing base of research suggests that monetary bonuses are not as motivating as previously assumed – or that bonuses can actually create a culture of short-term motivation to reach targets, which can damage long-term performance.

Anastasia Efremova points to this pitfall in her observation that poorly structured bonus systems can end up demotivating rather than motivating employees. 

"Bonuses need to be really well-structured and tailored to align with the company's goals, with measurable targets to work,” she says, “Plus, there also needs to be a way for managers to adjust the targets throughout the year as needed – otherwise employees start to feel that it’s impossible to meet the goals, so they stop trying, and that’s a situation you want to avoid.” 

Fixed targets that become obviously unattainable due to changing business conditions can quickly transform from motivational tools into sources of frustration. When employees perceive bonus targets as unrealistic, the intended incentive effect can backfire completely.

Perhaps most concerning for innovative companies is the potential narrowing effect that Anastasia highlights: "Bonuses can narrow employees' minds into one or two KPIs as the only focus, which isn't ideal when you're trying to encourage creative thinking or new ideas."

This tunnel vision effect can be particularly problematic in rapidly evolving industries or roles requiring adaptability and creative problem-solving. When employees focus exclusively on the metrics tied to their bonuses, they might miss opportunities for innovation or fail to respond appropriately to changing priorities.

Ultimately, the effectiveness of bonuses rely on the design of the employee bonus scheme

If there's one point all our experts agree on, it's that the effectiveness of bonuses hinges entirely on thoughtful design aligned with company goals and culture.

"There has to be a thoughtful approach to what you're actually incentivising and whether those are the right behaviors or priorities to incentivise," explains Anastasia Efremova. 

This means going beyond simply attaching bonuses to metrics. Instead, put careful consideration into the goals, priorities, and behaviours that each team actually needs – and regularly review this to ensure the bonus scheme remains in line with business priorities.

For companies considering implementing or revamping a bonus structure, Figen Zaim suggests taking a holistic view: "They absolutely have to be well-designed, and the whole structure of how you use different total rewards levers for different goals needs to be well thought through too."

This holistic approach means considering how bonuses interact with other elements of the total rewards package – from base salary and equity to benefits and recognition programmes. 

Each element should complement the others and support the overarching principles of the company’s compensation philosophy and strategy, rather than creating competing incentives.