Bonuses have become firmly entrenched as part of a business’s compensation package. And while they can be an effective way to recognize and incentivize employees, deciding when and how to award bonuses can be tricky for owners and managers to navigate.
Before getting into how to offer bonuses, let’s review the different types of bonuses and when they might be offered.
Bonuses can be used to reward outstanding performance or as a gesture of goodwill. The typical holiday bonus is an example of the latter. In the spirit of the season and to celebrate what has been accomplished over the year, employees receive a set amount of extra compensation. Many employees look forward to their holiday bonus. It helps pay for gifts or to cover additional expenses such as travel and parties incurred during the holidays.
Most employees also anticipate an annual bonus in recognition of their service to the company during the year. Depending on the company, this may be in addition to or in lieu of an annual salary increase. Some companies tie this bonus to employee performance. Meanwhile others may determine at the beginning of the year what the bonus amount will be – usually some percentage of the employee’s salary for that year. Annual bonus amounts will normally vary from year to year depending on the overall profitability of the company.
To incentivize employees to achieve key strategic goals or outcomes, companies often offer performance bonuses. The value of the bonus and how it can be earned is determined and agreed upon in advance with the employee or team. For example, a team might be offered a five percent bonus of their quarterly salary if they complete a project ahead of schedule and under budget. On a larger scale, if the company as a whole performs well for the year, employees may be eligible for other forms of compensation, such as profit-sharing or stock options.
Another common way of recognizing individual employees or teams is an on-the-spot bonus. This type of bonus is usually given for exceptional work. This can include excellent customer service, exceeding one’s goals, achieving a deadline or milestone ahead of schedule, cutting costs, innovations, etc. It should be given out close to when the notable performance has occurred. Aside from a nominal cash bonus, many companies will use other forms of rewards. This can include gift cards, celebratory lunches or happy hours, a vacation day, or extra personal paid-leave time.
Over the past few years with the tight labor market, many firms have been offering job candidates a hiring bonus. This is in addition to their other compensation as an incentive to join the firm. Sometimes this is paid as a signing bonus when the employee begins work. Other times payment may be deferred until the employee has successfully completed a probation period and is committed to staying with the firm.
While intended to boost employee morale and engagement, bonuses may have the opposite effect if not managed properly. Traditionally, employees in positions such as sales, management, project management, financial management and customer relations have had more opportunities to receive bonuses than most front-line workers and support staff. This can cause a great deal of resentment over perceived inequity. Especially if those positions are already well-compensated, which is often the case. Individual performance bonuses are usually negotiated behind closed doors, further raising suspicions of inequity and favoritism.
The Society for Human Resource Management (SHRM) urges employers to make sure bonus programs are equitable, transparent and clearly communicated to all staff. In addition, they should be tied to strategic measures of success and specific performance objectives. Rather than set a dollar amount or percentage cap, base the value of the bonus on the company’s profitability. Otherwise, employees may be incentivized to achieve only what they need to do in order to qualify for their bonus, and nothing more.
Another reason to link bonuses to profitability is to prevent employees from anticipating that their bonuses will increase each year. At the beginning of the business year, announce what the bonus options, criteria and values will be for that year. If you plan to award on-the-spot bonuses, you may want to provide a menu of rewards employees can choose from. One employee may be thrilled to receive a gift card, whereas another would appreciate some flexible leave time.
In developing a bonus program, keep in mind what you want to achieve. Use the appropriate type of bonus to reward different types of performance or behavior. Be explicit about why the bonus is being awarded, even if it’s only to show gratitude.
Generally, most employees want to be treated fairly and want their co-workers to be treated fairly as well. Talk with your staff about what types of bonuses and other kinds of rewards are meaningful to them. Come to a consensus on a bonus program that all employees can accept. Just as everyone on your team should be working to achieve the same goals, they all should be eligible to receive comparable recognition when they succeed.