Senior Client Partner, ESG & Global Leader Total Rewards
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Bonuses: Only How Much?
It’s what millions of employees expect every January—a lump-sum cash bonus dropped into their bank accounts.
The checks are mostly still being written, but many observers say they’re smaller than they were in 2023 or 2022. The average cash bonus paid to employees last month was down 21% from the previous year, according to payroll-software company Gusto. Every industry posted a decline that ranged from about 4% for technology firms to 36% for tourism and transportation companies. The trend affects employees of every rank, from the CEO down to midlevel and lower-level workers. “Lower bonuses are the general expectation of companies,” says Don Lowman, a senior client partner in Korn Ferry’s Global Total Rewards business.
Depending on the industry and role, year-end cash bonuses can represent a significant chunk of an employee’s short-term compensation. That means they can determine the answer to some big financial questions—how large a down payment to make on a piece of real estate, for instance, or whether to buy a new car.
When bonuses are down, the underlying reason is always a crucial question for workers. For their parts, some organizations may attribute the cuts to challenging economic conditions or higher expenses. Indeed, many industries have laid off white-collar workers, particularly at the beginning of 2023. But in many cases, organizations are still about as profitable as they were a year ago. The estimated net profit margin for S&P 500 firms is 11.6%, slightly lower than 2022’s 11.8% margin, but above the ten-year annual average of 10.6%.
Instead, what’s impacting bonus payouts isn’t how companies performed in 2023, but how they thought they would perform, says Todd McGovern, global leader of Korn Ferry’s Total Rewards business.
Cash bonuses are often based, at least in part, on the degree by which the employee and company surpassed expectations. In 2021 and 2022, on the heels of the pandemic, those expectations were set very conservatively, McGovern says. When the economy rebounded in 2021 and continued to do well in 2022, meeting targets became quite easy. Some executives, McGovern says, were getting payouts of 150% of their targeted bonus. More payouts, perhaps not as large by percentage or total amount, flowed down through entire organizations. “They ended up killing it on the goals,” he adds.
Goals were ratcheted up for 2023, however. Leaders felt that their companies had more visibility in the post-pandemic world. Doing very well became their new objective, and bonus targets were adjusted upward. But executives are not hitting the upper reaches of their bonus targets, and lower-level managers are distributing bonuses to their direct reports from smaller pools.
Explaining this situation to employees might be tough for leaders. Unfortunately, experts say, bonuses are often delivered without explanation. “It amazes me how infrequently any communication happens. People just send out the bonuses,” says Tamara Rodman, a Korn Ferry senior client partner in the firm’s Culture, Change and Communications practice. She says that leaders should communicate some rationale to explain why bonuses are what they are—regardless of whether they’re higher or lower.
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