Employee bonuses are monetary incentives given to employees who meet or exceed job expectations. Employers across all industries widely practice this to encourage high levels of productivity, reduce costs, and foster a shareholder mindset among employees.
The amount of the bonus, whether in cash or stock options, typically reflects the employee’s experience and level of responsibility in the company. As employees rise in the ranks, a larger portion of their compensation is tied to individual and company success. This means that higher bonuses hold employees more accountable for the overall achievements of the company.
Despite research suggesting that individual monetary rewards don’t necessarily enhance motivation, work bonuses remain a preferred method for attracting and retaining top talent. Before implementing an employee incentive plan that includes pay-performance rewards, it’s crucial to understand the types of employee bonuses you can offer. Familiarizing yourself with the benefits and potential disadvantages of various incentive plans will guide your recruitment process and shape your organization’s culture.
1. Performance Bonuses
A performance bonus is a lump sum of cash given to employees who have achieved significant work milestones and consistently met their performance goals. Employers establish a set of expectations and priorities that employees must surpass within a specified timeframe to receive a monetary reward. Examples of these goals can include consistently meeting sales quotas, successfully leading high-visibility projects, or exhibiting excellent problem-solving skills.
- Performance bonuses can drive high levels of productivity within a short period, which is especially beneficial for meeting year-end earnings targets.
- Performance bonuses provide instant gratification and have broad appeal compared to non-cash incentives.
- Distributing performance bonuses is easy since they can be paid as cash or added to an employee’s paycheck.
- The motivational effects of performance bonuses may diminish once the employee receives the reward.
- Frequent bonus payments, irrespective of performance (e.g., holiday bonuses), can foster entitlement and resentment instead of appreciation toward management.
2. Hiring Bonuses
While most job offers include a starting salary or hourly wage, some companies offer hiring bonuses to attract professionals with unique skills. Hiring bonuses are designed to make a job offer more appealing, especially in a competitive job market. For candidates, a hiring bonus can sway their decision when considering multiple job offers.
However, accepting a hiring bonus has its caveats. Hiring bonuses are considered taxable income and are typically paid after the candidate starts working. They may also be subject to specific terms and conditions outlined in the employee’s contract. For example, the employee may be required to repay the hiring bonus if they leave the company before completing at least one year of employment.
- Employers can position their companies favorably in a job market where qualified candidates are scarce.
- New employees are motivated to work hard and meet high expectations due to the employer’s financial investment in hiring them.
- The company may lose its investment if the candidate leaves shortly after being hired.
- Similar to performance bonuses, the motivational effects of hiring bonuses may diminish once the candidate receives the lump-sum payment.
3. Stock Option Awards
In addition to a lump-sum payment, employee bonuses can also come in the form of company stocks. Stock option awards are more common in management incentive plans for executives. However, in recent years, cash-strapped companies, including startups, have used stock options to enhance compensation packages for new employees. Stock option awards:
- Vary in volume, ranging from several hundred to several thousand shares.
- May be subject to rules such as requiring authorization from the company’s Board of Directors or Trustees before selling the shares.
- Employees in management positions are incentivized to think like shareholders and act in the company’s best interest, given their financial stake in the organization.
- Employers can adjust options by decreasing the exercise price or issuing additional options at a lower price to adapt to market trends. This helps prevent sudden dilution of stock ownership if many executives decide to sell their shares.
- Without a robust management incentive plan, executives can receive significant payoffs based on industry and market trends rather than their actual merit and performance.
- If the company’s stock declines over time, both the motivation to perform at high levels and the value of the stock may decrease.
Timing and Distribution of Employee Bonus
The timing and distribution of employee bonuses vary depending on the industry, organization, and job role. Generally, performance bonuses are awarded annually, biannually, or quarterly after the employee’s performance review. Some organizations also provide “holiday bonuses” around Christmas or year-end. Hiring bonuses are an exception and are paid shortly after the new hire begins their job.
The timing and frequency of bonuses are usually linked to the organization’s performance and its ability to generate and share wealth with employees. While bonuses are meant to reward excellent work, it’s important to communicate to employees that performance incentives are not guaranteed, especially during economic downturns or challenging periods for the company.
Additionally, employees should be aware that the IRS considers bonuses as “supplemental wages” and taxes them either at a flat percentage rate or based on the combined amount of their normal pay and bonus.
Bonus plans serve as a means of communicating the core values upheld by the company and the behaviors it deems worthy of celebration. Most companies provide bonuses as a way to show appreciation for a job well done and to express gratitude for employee loyalty and contributions throughout the year. Managers hope that employees will continue to perform at high levels, delivering results, generating increased revenues, and attracting similarly motivated individuals to the company.
While bonuses are hailed as motivational tools by some, industry experts caution against their misuse, which can lead to confusion between gifts and rewards among workers. Research even suggests that top performers are motivated not solely by money but by factors like competitiveness and autonomy in the workplace.
Regardless of the approach you choose, it’s up to you and your leadership team to decide if including employee bonuses in your compensation plan will benefit the long-term health of your company. By carefully analyzing the advantages and disadvantages of employee bonuses, you can create an incentive program that improves performance, promotes ethical behavior, and supports the professional development of your employees.