Employee bonuses provide additional compensation to employees beyond their annual salary or hourly pay rate. There are several different types of bonuses that can be issued at various times for a wide range of reasons.
Some bonus plans are tied to performance, while others are issued as goodwill gestures, typically around the winter holiday season. You can even offer employee bonuses for things like referrals, new hire sign-ons, and more. It’s also common for employers to reward employees with a bonus as they celebrate certain milestones, such as a work anniversary.
Employee bonus plans are designed to keep morale high and compensate your staff for a job well done. Implementing a bonus plan in your company can improve productivity and help you build a strong company culture.
Regardless of your business size or industry, anyone with employees can benefit from an employee bonus plan. Even small business workers will feel extra motivation to perform at a high level, knowing that there’s a reward for their efforts.
But before you start handing out bonuses, there are certain requirements you need to consider. This guide will steer you in the right direction.
Why Do Employee Bonus Plans Matter?
Employee bonus plans are often referred to as employee incentive plans since that’s exactly what they provide. When you incentivize your employees to work harder, they’re more likely to perform at a higher level. Organizations with employee bonus plans tend to benefit from better productivity and lower employee turnover rates.
What Does Success Look Like?
The basic idea behind an employee bonus plan is simple—employers issue some type of additional compensation to their staff. But simply giving everyone an extra $1,000 at the end of the year or handing out free concert tickets doesn’t automatically ensure success.
It’s important to structure your bonus plans in a way that yields maximum results for your organization.
For example, suppose everyone in the company knows that they’re getting a fixed dollar amount annual bonus every year during the holiday season. In that case, it doesn’t give them an incentive to work harder throughout the year.
Conversely, if you’re issuing performance-related bonuses every quarter, it encourages your staff to perform at a higher level all year. A higher frequency of payouts also provides positive reinforcement, as your employees will see the tangible results of their hard work.
An easy way to measure the success of your employee bonus plan is by looking at the numbers. Look at KPIs like sales, revenue, customer satisfaction scores, and other numbers before and after implementing your incentive plan. If the numbers remain the same, then you know the plan isn’t working and needs to be adjusted.
You can also use an employee bonus plan to measure the success of your recruiting and onboarding process. A competitive bonus package can give you an edge over other organizations making offers to the same talent. Beyond the initial sign-on bonus, you want to make sure you’re retaining those new hires for the long haul as well.
For example, let’s say you’re hiring an employee with a base annual salary of $85,000. You might also offer a $10,000 signing bonus, with extra incentives to earn an additional $25,000 in bonuses throughout the year.
Typically, employees need to stay with a company for a minimum amount of time to keep the signing bonus. But if your employees are leaving after that minimum time is up, it’s not a good sign. It could mean that the rest of your bonus plan isn’t lucrative enough for them to stay.
Another sign of success is clarity. If your employees are confused or asking lots of questions about the bonus plan, it’s a problem.
The last thing you want is for your staff to think they’ve earned a bonus, only to learn that they didn’t qualify for some strange reason. Or worse, they fail to perform at a higher level because they don’t realize a bonus can be earned for certain accomplishments.
If the bonus policy is clear, KPIs are on the rise, and your staff is actually earning the bonuses, it’s a great sign that you’re doing things the right way.
Case Study
An interesting case study example of a successful employee bonus plan is the story of a food ingredient manufacturing company. What I love about this story is that the manufacturer already had an employee bonus plan in place, but they were able to achieve success by changing it to align more with the overall business goals of the company.
The sales reps were rewarded individually based on products they sold and received a bonus based on a percentage of their region’s gross margin. As a result, most of the sales team spent time selling established products with the highest margins.
However, the company realized that this bonus structure wasn’t incentivizing the sales reps to sell new product offerings, therefore limiting the market share potential of new products.
They decided to restructure the bonus plan to reward sales reps based on units sold instead of gross margins. The company also split its products into three distinct groups and offered the highest per-unit incentives for newer products.
As a result, the employees were able to receive higher bonuses than they did under the previous plan, and the company was able to expand its newer product lines.
By aligning the employee bonus plan with the overall strategic business objectives, it’s a win-win for everyone.
One Secret Weapon For Employee Bonus Plans
It’s always easier to implement and create an employee bonus plan if you’re using modern HR software. Our secret weapon for administering employee bonus plans is Paycom.
Paycom is an all-in-one solution for payroll, HR, recruitment, time tracking, scheduling, and more. What really makes Paycom unique compared to other tools in this category is its talent management features—including performance management and compensation budgeting.
With Paycom, you can easily issue bonuses using the payroll function, but you can also align bonus plans with your organizational goals. There are features for real-time feedback, goal tracking, performance data, and more. Just request a consultation for more info on pricing.
3 Essential Strategies For Employee Bonus Plans
To ensure success, there are certain strategies, tips, and best practices you need to follow when you’re creating an employee bonus plan. The strategies described below will ultimately lead to better performance across the organization.
Strategy #1: Align Your Employee Bonus Plan With Organizational Goals
Many businesses make the mistake of just randomly selecting a bonus plan and assuming it will make everyone work harder. While this may cause some KPIs to improve, it won’t automatically translate to achieving your top business priorities.
To implement this successfully, you need to determine what types of bonus plans work the best for your business. These are the most common options to consider:
- Spot Bonuses — As the name implies, a spot bonus is given when an employee demonstrates behavior that goes above and beyond their job duty. Something like providing exceptional customer service could trigger a one-time spot reward.
- Referral Bonuses — Referral rewards are offered when an employee refers a job candidate who is ultimately hired. The idea behind this strategy is to motivate your staff to help with your recruiting process.
- Sign-on Bonuses — Often called signing bonuses or hiring bonuses, these are one-time cash payments offered to new hires when they join the company. This strategy is used in industries where top-level talent is hard to find, and offering a bonus could give you an advantage over other businesses targeting the same candidate.
- Profit Sharing — Profit sharing offers employees bonuses in the form of a percentage of quarterly or annual profits. It’s common for profit-sharing bonuses to be joined with your 401(k) plan and distribute profits as retirement contributions.
- Milestone Bonuses — Milestone bonuses can be offered for employee anniversaries or on a short-term basis for completing specific tasks or projects.
- Performance Bonuses — As the name implies, these bonuses are directly tied to employee performance. This is the most common type of bonus structure for sales representatives, as it provides them with extra incentive to sell more for the company.
- Non-Cash Bonuses — Aside from monetary rewards, you can offer bonuses in the form of time off, achievement certificates, company cars, event tickets, electronics, employee of the month parking, dinner gift certificates, and more. These can keep morale high in organizations on a tighter budget and limited cash flow.
- Holiday Bonuses — Holiday bonuses are offered at the end of the year to recognize your staff for a job well done. Just make sure that you avoid tying the bonus to any specific religious event (for example, call it a holiday or end-of-year bonus instead of a Christmas bonus).
Not all of these will make sense for certain big-picture organizational priorities. It’s up to you to determine which bonus structure will help you achieve your goals.
Refer back to the case study we discussed earlier. The company’s existing compensation plan only motivated the sales team to sell established products. But the new plan prioritized new products and market share expansion.
The employees received higher compensation, and the organization was able to reach new markets with newer product offerings.
Strategy #2: Create an Appropriate Budget For Bonuses
Avoid making fixed-dollar guarantees in your bonus plan. This can lead to problems during quarters and years where sales are down, or cash is limited.
The last thing you want to do is create a bonus plan that restricts your company’s cash flow, which can obviously lead to much bigger problems.
That’s why we recommend Paycom as our secret weapon for employee bonus plans. The software has specific tools for compensation budgeting.
The tool makes it easy for businesses to achieve the following:
- Gain full control over employee bonus budgets
- Ensure budget increases are equally weighed to contributions
- Create a merit matrix that includes budget and performance ratios
- Adjust the merit matrix and offer lump sum cash rewards
- Automatically sync bonus data with payroll
- Real-time view of compensation spending with custom reports
You need to make sure that your bonus plans are sustainable, and Paycom makes that happen.
As mentioned earlier, it’s a sign of success if your employees are actually receiving bonuses for their hard work. But that’s not the case if those rewards are crushing your company’s cash flow.
Strategy #3: Put Your Employee Bonus Plan in Writing
Your bonus plans shouldn’t be a mystery. Everyone in your organization should have a clear understanding of the structure, payouts, and requirements.
Consider adding the bonus plan to your employee handbook. This is something that’s issued to all new employees on their first day of work.
If you’re using HR software to manage your staff and administer benefits, the bonus plan information and handbook should be available in an employee-self service portal. This allows your staff to refer to the plan at any time to ensure they know exactly what it entails.
It’s important to be as transparent as possible here because you want your employees to trust you. If they feel like your plan is unclear, they don’t really have any incentive to work any harder.
But when the plan is clearly defined in writing, it helps improve productivity and KPIs across the organization. Everyone will have an incentive to do better, knowing they’ll be rewarded appropriately.
Most Common Mistakes of Employee Bonus Plans
As we’ve already established, employee bonus plans are more complicated than they appear on the surface. This often leads some employers to make the following common mistakes:
- Relying solely on C-suite or manager discretion: Bonuses issued solely on whether or not the boss feels like giving them out create too much confusion for employees. It also hurts morale if the staff feels like they’re doing a good job but ultimately don’t get rewarded.
- Making them too complicated: Complex bonus plans are often the result of leadership trying to micromanage performance. But these plans usually backfire as employees don’t understand the terms.
- Only using cash as a reward: Obviously, cash bonuses are preferred by employees. But you can incentivize them with other rewards throughout the year, such as event tickets, electronics, more vacation time, and other non-monetary perks.
- Favoritism and unfair compensation: Your bonus plans need to treat everyone equally, regardless of how you feel about them on a personal level. While everyone’s pay is supposed to be private, it could kill employee morale if your staff finds out you’re playing favorites.
Overall, employee bonus plans are great for businesses of all sizes. They help boost productivity, retention, morale and even improve your recruiting strategy. Use this guide as a resource to implement a successful employee bonus plan for your business.