The Skinny on Bonuses

“Bonus” is a term we’re all familiar with in a general sense, but today we’re going to step back and look at the concept in the context of your overall compensation strategy.

Bonuses allow organizations to link employee compensation to performance and encourage increased productivity. They can be used as an incentive to retain top performers and can be used to eliminate or reduce annual salary increases.

One important—yet often overlooked—benefit of benefits from the employer perspective is that employees tend to view them as gifts outside the normal confines of their regular (and expected) pay. As such, the judicious use of bonuses can generate a lot of employee goodwill and loyalty at a fraction of the cost of raises.

Looking to manage your organization’s compensation programs with confidence? Start on Tuesday, August 25, 2015, with a new interactive webinar, Mastering Compensation: How to Ace Your Understanding of Key Principles for Compensation Planning Success. Learn More.

Types of Bonus Payments

Express bonuses are those that are promised (e.g., you will receive this much); implied bonuses might be reasonably inferred (e.g., if sales goals are met, you might expect to receive a certain percentage of your salary as a bonus). The following types of payments can accurately be described as bonuses:

• Performance awards. These can be given for specific, individual, or group achievements and are commonly used to establish incentives for the fulfillment of particular organizational goals. They range from large payments made to high-level executives who have achieved objectives to inexpensive gifts awarded to employees for exceeding defined targets.
• Gain-sharing systems. These awards typically reflect the margin of profit or savings realized through an individual’s or a group’s efforts. Although it can be difficult coming up with a “fair” method of calculating the gain, these types of bonuses offer strong incentives for exemplary team performance.

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• Profit-sharing. A profit-sharing plan is a group incentive plan that includes all employees in an organization and that focuses on overall business unit profit (or a similar bottom-line financial goal). Profit-sharing plans provide a financial safeguard for funding by ensuring that an overall business unit profit level is achieved before any payouts are made. Generally, these payments are distributed to all employees having the requisite seniority—not just to particular work groups—and tend to be less directly related to performance.
• Sign-on bonuses. Many employers pay sign-on bonuses to attract needed workers, especially hot-skills workers in high-demand fields like IT. Sign-on bonuses can offset demands for higher starting salaries and thus leave the company’s base compensation program intact. On the downside, however, sign-on bonuses can be highly inflammatory to existing workers who are disgruntled about their own pay, perks, or other aspects of their jobs.

The Right Amount Is Critical

Bonuses that are tied to individual job performance or to performance of the organization tend to be seen as an element of regular compensation, especially if given on a regular and consistent basis. Also, consider the amount of the bonus you plan to offer; it should be more than a mere gesture but not so much that it will be devastating if withdrawn or restricted.

Tomorrow, we’ll look at a special category of bonuses: sales team incentives, plus an introduction to the interactive webinar, Mastering Compensation: How to Ace Your Understanding of Key Principles for Compensation Planning Success.