Updated as of June 2018.
Bonuses are the hot-red cherry on top of a hard-earned paycheck. Also called variable compensation, a bonus is simply extra cash companies give to employees for doing a stellar job. In fact, in 2015, Aon Hewitt found that 90 percent of employers offer some type of bonus program. Employees crave them, and employers want to offer them, but it can be hard to structure a program that works for both sides of the table. In this article, we’ll walk you through what a successful program looks like so you can go ahead and kick one into motion.
Why do employee bonuses matter?
From spot bonuses to performance bonuses, tacking money onto employees’ paychecks can do a lot of wonder. Here are the biggest reasons they’re important:
- Motivates the team: When people have something to work toward, regardless if it’s an individual or company-wide objective, it can incentivize them to accomplish it.
- Attracts quality talent: If you’re trying to close a candidate, offering a signing bonus can be a great way to put the finishing touches on an offer.
- Improves morale: When people are bogged down, ushering in a bonus program can help give people a pep at work.
- Brings you closer to success: This is the heart of it all. When people earn bonuses, it’s usually because they knocked something out of the park. You want that to happen, over and over again. Because when your employees shine, so do you.
However, keep in mind that a bonus program is usually just one sliver of the motivation pie. Things like ensuring employees have a purpose, investing in personal and career development, and recognizing the team in a variety of ways should also be woven into your toolbelt.
What kinds of bonuses are out there?
New to the bonus world? This list will give you a quick refresher.
- Sign-on bonuses for when new hires start
- Daily or weekly bonuses tied to sales goals
- Spot bonuses for recognizing people spontaneously
- Referral bonuses for referring new employees
- Anniversary bonuses for hitting a work anniversary
- Holiday bonuses to end the year on a high note
- Individual bonuses that go to one person only
- Company-wide bonuses that everyone on the team receives
- Annual bonuses which people get once a year
- Quarterly bonuses which people get after a four-month timeframe
Beware of over-doing your bonuses
Bonuses can be more of an art than a science. What, when, and how much to give can either incentivize your team in just the right way or cause an outcome you don’t really want. Behavioral economist Dan Ariely conducted an experiment where he gave low, medium, and high bonuses to people doing the exact same task that called for some cognitive ability. The groups that were offered the low and medium bonuses performed on the same level, while the group that got the high bonuses performed the worst. Counterintuitive, right? Turns out, a substantial bonus can cause people to put too much pressure on themselves and can muffle their productivity. So pick a solid amount, but don’t go overboard.
Ready to create a bonus program? Here’s your guide for setting up an awesome one.
Follow the steps below and your bonus program will be a reality before you know it.
Set goals. Then, tie bonuses to those goals.
There are two common ways to tie bonuses to goals—at the individual and/or company level.
1. Individual goal program
Bonuses and all-star performance go together like ketchup and fries. Let’s say you offer a holiday bonus every year. Without having performance goals packed into the equation, employees will just expect it to happen every time December rolls around. Therefore, it won’t be as strong of a motivator.
That’s why every role in your company should have a set of goals that are unique to the job. These goals shouldn’t be pipe dreams—they should be doable, simple, and easily measurable so there’s no question of whether or not someone achieved them.
Here’s how simplistic you and your team should think about the connection between goals and incentives:
If I achieve X, I will get an extra $X.
If a person accomplishes that goal, then the bonus should have their name on it.
2. Company-wide goal program
Another approach is to introduce bonuses that are tied to both individual and company-wide goals, or just the latter. So if your company’s objective is to grow by 35 percent this year, and your team reaches that number, you can add a separate bonus on top of or instead of your employees’ individual ones. While it’s a bit more complicated, a company-wide bonus celebrates everyone bringing the business to that milestone.
Choose an amount that actually makes a difference
Money talks. The amount that an employee will gain from a bonus should be enough to drive them to truly go above and beyond. To get there, think about how much they’re currently making and what a meaningful amount would be compared to that number. So if your employee earns $75,000 a year, a $100 bonus isn’t that substantial compared to the salary they’re bringing in.
Everyone likes instant gratification, and the same goes for bonus programs. When thinking about the payout date, try to make it as close as possible to when the work was accomplished. Making it timely may also encourage other people to emulate whatever work the bonus awarded.
Know the tax implications
There’s no getting around it—bonuses get taxed. When you’re picking a number, be sure to take the amount your employee will ultimately take home into account.
Because a bonus adds more to your team’s compensation package, it can be taxed in a few ways. The most common method is the flat 22 percent supplemental rate, which taxes the bonus directly. This means that if you give out a $2,000 bonus, $440 of that (22 percent of $2,000) goes straight to the IRS. Many companies prefer this approach because it’s easy to do and takes less money out of the bonus than other methods. Another tactic is called the aggregate method, which is when you combine your employee’s bonus and wages together and then withhold taxes based on that larger amount. Need help with the tax part? Some payroll providers can do this for you automatically.
Write out the basics and communicate them to your team
Once the amount and goals are cemented, the next step is to put it all in writing. A good bonus program should have no surprises baked inside. In fact, your employees should always know exactly where they stand in terms of how they’ll reach their bonus. Your job is to help your team get that shiny reward, because ultimately, that’s what makes your business more successful in the end.
Here’s what to think about as your bonus plan starts to jell:
- Who’s eligible? Full-time and part-time employees? Spell it all out.
- When do they become eligible? After a certain amount of time or right when they start?
- How much is the bonus? If there are tiers, list out what the flat amounts or percentage of income are for each level. Remember, the simpler the better.
- When do people receive it? When should they keep an eye on it? Be clear if it will appear on the next pay cycle, in the next two pay cycles, or at another time.
- How does it evolve based on tenure? If a person has gotten the same bonus for the past two years, does it grow in the third year? Think through each situation your employee might face.
After flying through the list above, you’ll be more equipped to launch a thoughtful incentive program. Just remember to be clear about what’s involved, and keep close tabs on the program to see if it’s making an impact. Then watch as your employees start to outshine their pre-bonus versions of themselves.