A bonus is extra money paid to employees in addition to their wages or salary. Sometimes called “incentive pay” or “variable pay,” bonuses are used to incentivize qualified candidates to work for the company, motivate employees to achieve organizational goals and reward employees for their contributions. All of this makes bonuses a highly influential tool for recruiting, engagement, and retention.
According to a 2021 report by PayScale, “the majority of organizations (69.6 percent) offer some kind of variable pay as part of a total rewards package (e.g., bonuses).”
However, offering bonuses does not necessarily mean that the bonus program is successful. Here are three qualities of an effective bonus program.
1. It’s designed for your particular business needs
Bonuses come in many forms, and employer needs vary widely. Therefore, a bonus program should be tailored to the business strategy and compensation philosophy.
The 2021 PayScale report ranks these bonuses as the most popular among employers:
- Individual incentive bonus (53.1%).
- Employee referral bonus (34.2%).
- Companywide incentive bonus (33.4%).
- Spot bonus or other discretionary ad hoc bonuses (30.8%).
- End-of-year bonus (25.9%).
- Hiring bonus (21.8%).
- Profit-sharing/stock options/equity bonuses (18%).
- Team-based incentive bonus (16.9%).
- Retention bonus (15.2%).
Though many employers offer a combination of the above, what’s suitable for a given company depends on their business needs, what’s likely to motivate their employees, and its financial position and outlook. Some businesses pay bonuses according to the employees’ length of service or a percentage of their salary. Others provide a small, flat amount. Some determine bonuses based on how well the business performs during the year.
Consider the objectives of trying to reach and decide which bonuses can help best achieve them.
For example, a few ideas to offer may be:
- Referral bonuses to existing staff if you need to employ more people.
- Hiring bonuses for hard-to-fill roles.
- Spot bonuses to employees who successfully complete a special project.
- Stock option bonuses to retain key employees.
2. It’s financially realistic
A bonus program should be within financial reach. In other words, pay what can be afforded. If bonuses are tied to performance goals, assume that everyone will hit their marks when designing the program. This is the only way to be sure that it will have enough money to go through with the program no matter what.
3. It has clear parameters and expectations
Make sure employees know who’s eligible to receive bonuses, what constitutes eligibility, when to expect bonus payments and how bonuses are handled when employees terminate.
If bonuses are linked to performance, explain clearly to employees what they need to do to receive the bonus. This way, there will no misunderstandings when employees do not get a bonus because they failed to reach the established goals.
A bonus policy should be equitable, documented, well-organized and consistently applied. It is also important to measure the program regularly to determine its success and to make the required improvements.
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