How Raises and Bonuses Affect Small Business Budgeting

Employers should strive to treat employees well each and every day, and giving them a little special recognition with bonuses or raises at the end of the year is one way to do it. Bonuses and raises can play dual roles — they keep employees happy, but they may also encourage the best and brightest employees to stay loyal to the business. Here's some information on how a program of raises or bonuses can affect small business budgeting.

Who gets a raise?

As a business owner, determining whether or not an employee should receive a raise may be based on two factors:

1. Small business budgeting

Understanding profit, cash flow, and operational management will allow for an accurate estimate of how much money is available to pay employees each year.

2. Employee performance

Assessing employee performance on a regular basis and setting tangible benchmarks can give organizations an idea of who has consistently performed above expectations. This system sets up a framework for a performance-based bonuses-and-raises system rather than awarding every employee a year-end raise.

How are raises calculated?

In some industries, pay increases may be defined and/or subject to regulation. But small businesses may have more discretion in this area. How well a company performed throughout the year may dictate how much money is left for bonuses and raises.

Some small business budgeting doesn't actually take into consideration employees raises or bonuses — the margins are just too tight from the start. In other cases, small business owners may not have handled their books appropriately throughout the year, and mismanagement of financial statements will inevitably create a lack of raises or bonuses for the employees.

For those companies fortunate enough to consider bonuses and raises, a recent Towers Watson survey of U.S. companies states that the 2015 national average pay raise is expected to be about 3 percent. So, if an organization has not set up a performance-based bonus system, a 3 percent increase across the board would be considered "the norm."

What are the alternatives?

If granting an across-the-board raise doesn't work for an organization, consider one or both of these less typical forms of bonuses.

1. Giving stock instead of cash

When an organization gives an employee stock in a company, or an equivalent stake in a small business, there is an argument to be made that an employee will in turn show more dedication and productivity. Stock options naturally align organizations and employees with the same goals in order to pave the way toward a more productive workspace.

2. Funding qualified retirement plans

Placing money into an employee's retirement account is a long-term vision that may initially go unrecognized, especially with younger employees, but if the magic of compound interest starts working for an employee's 401(k), this style of bonus may be considered the most meaningful.

While employees may be grateful for any acknowledgment of hard work throughout the year, it's important to consider the impact of monetary rewards on their productivity, their loyalty, and your small business budgeting.