bonus or raise?

If I had to choose only one word to describe the source of all pain and pleasure for a small business, it would have to be CASH. A startup lives and dies by its cash flow and keeping overhead expenses in check is one of the most critical factors in managing that fragile lifeline. This is why so many startup decisions need to be viewed through the cash flow lens. So when I’m asked the question,

“Which compensation type is better for a startup? A raise or a bonus?”

the answer from my perspective is easy. In large part, it depends on your cash flow.

The objective of a raise or bonus is to acknowledge, reward and motivate your employees. Regardless of how awesome your corporate culture claims to be, at the end of the day you have a financial agreement with your staff. They provide you with excellent work and, in return, you should provide them with a pleasing work environment, a clear career path with measurable and attainable milestones, new and challenging opportunities and, above all, a pay cheque. And just like any other agreement, it’s usually the money that matters most.

It’s always important to establish the reason for the employee raise or bonus. If the objective is to acknowledge a specific project or accomplishment, a bonus directly ties the reward to the activity. If you are trying to create a meritocracy this can reinforce a powerful message about your corporate culture, but only if you are consistent with bonus recognition.

Conversely, if the objective is to acknowledge a milestone in an employee’s career path, or an educational achievement, a raise is more appropriate. Again, as a cultural foundation for your company, aligning your salary structures with employee career paths can result in challenged, motivated and educated staff.

However, no salary or bonus decision should ever be made without consulting your cash flow. As a startup, your overhead expenses will have a direct impact on your future success or failure. Grow too quickly and you’ll likely run out of cash. Grow too slowly and you’ll likely miss out on good opportunities and good people.

So which is the right decision for your company?

Ideally, compensation should match the objective and your employees should understand why they’ve been given the reward and how they can continue to receive more. Unfortunately, the reality of your cash flow will often influence your decision.

But before you can break the good news to your staff here’s one last thing to keep in mind. It’s been argued that the lasting impression of a monetary reward is relatively fleeting. In other words, a cash bonus today will have just about the same impact as a raise. The big difference is that the cash bonus will hurt your cash flow today. The raise, however, sets an expectation for all your employees and will hurt your cash flow forever. And if your cash flow can’t afford a bonus today, the bonus is probably too high for your current cost structure.