A Guide to Employee Bonuses: Types of Bonuses + Bonus Calculation Methods
It’s that time of the year: Christmas lights are twinkling, and eager employees are expecting rewards! But how do we award them bonuses? Well, let’s find out!
When you first establish your company and hire employees, you may be anxious about how you will make payroll each paid month. However, if your company is well-established, you may be able to pay your employees more. Bonus compensation is something you should think about for your staff.
What Are Bonuses for Employees?
Bonuses are usually given out based on how well you do. Employees are placed on teams or companies based on how well they help the company reach its goals. Bonuses may be given out at a specific time, quarterly, annually, or right away. This depends on the type of bonus and who is eligible. There are, however, a lot of other types of bonuses:
What Are the Types of Bonuses You Can Give to Employees?
1. Spot Bonus
This type of bonus is given right away if an employee does well. It's usually linked to a unique idea, above-and-beyond service, or a surprise contribution to a project’s success. Once in a while, you get something like this. It might be money, tickets to a theme park, or even a mention in the company newsletter.
2. Referral Bonus
Current employees can be great recruiters, especially for hard-to-fill jobs. A bonus for referring good job candidates encourages current employees to do so. It is usually not given until after the candidate has been hired and the probationary period is over. The most common way to pay for this bonus is to pay a flat money rate.
3. Signing Bonus
This type of payment encourages people to take a new job. It's used as a form of a relocation package or to make up for salary demands that can't be met when an employee walks away from something (like in the middle of a plan year, disqualifying the employee for a company bonus or incentive plan).
4. Retention Bonus
These bonuses are given to employees who are important to the company to get them to stay. When someone else makes an offer that is better than yours, you might get a raise in your basic salary. During a merger or acquisition, employees may be given bonuses to keep them at the company during a time of change. Afterward, these incentives are paid out. They happen after the agreed-upon time has passed.
These are payments that aren't guaranteed and are based on how well an employee does at work. Sales jobs and jobs in recruiting and a lot of other industries are usually paid through a commission structure based on a fixed percentage or formula. According to the plan, payments are made when the commission is earned and when the plan says they are. The commission is usually based on a goal or quota.
6. Annual Bonus
Annual bonus calculations are usually based on how well you did, like how much money you made or revenue. This is usually in line with the company's long-term goals. The bonus is linked to the company's long-term goals and serves as a reward for good work. The size of the bonus is determined by how well the company does. The term "profit-sharing" can also be used to describe this. Companies don't pay out bonuses for a whole year, and most programs require workers to be at work when they get them.
Benefits of Providing Bonuses
Smart employers know that retaining top personnel requires competitive pay and benefits. Compensation includes wages, salaries, bonuses, and commissions. Benefits are an important part of employee compensation because they match the goals most employees seek.
1. Keep top talent
People are continuously attempting to improve their financial status. Those worth money are aware of their worth and seek jobs that compensate them accordingly. Examine your competitors' pay and perks. Make sure you provide a similar package to future employees to attract top talent. This saves time and money, allowing business owners to focus on other tasks.
2. Improve employee morale
Paying employees fairly shows you value them as employees and people. Feeling valued at work motivates people to come to work. The enhanced business morale motivates people to come to work and achieve well. Employees are more driven to attain higher goals when they know they can earn incentives or commissions. Bonuses and commissions become a focus for achievement.
3. Retain employee loyalty
Employees that are happy and well paid tend to stay with a company. Employees stick with their companies because they are paid well. Loyalty eliminates the need for business owners to attract new personnel. Employers who build a workforce that knows what to do benefit from high employee retention. That group is also excited to be a part of the team and does amazing.
4. Better Profits
Happy employees produce more. Employees that feel valued are more motivated and loyal, leading to higher production. Employees are more motivated, learn more, and become more efficient the longer they work for the company. All of this increases productivity.
5. The Job Satisfaction Factor
The right remuneration approach enhances job satisfaction. Benefits and other bonuses are correctly reflected in the compensation plan. Workplace Christmas bonuses are often discussed, as are employee stock options. When a company succeeds, the right pay scheme integrates employees, increasing their sense of fulfillment. People like being recognized for their efforts, and they know it.
Disadvantages of Providing Employee Bonuses
1. Some employees are upset
Employees who work hard but do not receive bonuses may be angry. The incentives drive some staff away. Their performance declines because they can no longer compete.
2. Inbuilt restriction
Building individual and group reward programs vary between departments. If you work in manufacturing, you can conduct bonus calculations based on how many things you produce or how many errors you avoid. On the other hand, salespeoples’ bonus calculations are based on their earnings.
Employees desperate for pay may act in ways detrimental to the organization. They may prioritize production output over quality. If you want to make a lot of money, sales associates may provide customers discounts or bargains.
It isn't easy to find a metric that works for everyone. A newspaper may reward sales associates who earn more advertising revenue than the average. But how should they be paid?
How Does Calculating Employee Bonuses Work?
Most performance-based bonus calculations for the year can be done using an Excel spreadsheet, depending on how complicated they are.
Here is an example of a company’s bonus structure: When the company meets all of its strategic goals, it is considered successful. Employees who work on the front lines will get a one-time payment of $1,500 from the company. Senior Leaders will get 20% of their annual income. Managers and supervisors will get 15% and 10% of their annual income, respectively. On a prorated basis, each person's pay depends on when they were hired.
An executive who earns $160,000 a year will do the following bonus calculation method:
ANNUAL SALARY * PERCENTAGE OF BONUS
It's the same for both managers and supervisors because both worked in the plan year. The manager and supervisor bonuses are then divided up. When the manager has worked for three months, they are paid 25%. The supervisor is paid 67%—8 months into the job.
While the front-line worker gets the whole flat dollar amount (based on how long they've worked for the company), if the person isn't exempt, the bonus may be used to figure out the person's normal pay rate. The DOL Code of Federal Regulations, section 29CFR778, gives even more information.
A lower bonus percentage may be used if the company doesn't do well. For example, if the company only met half of its goals, the bonuses would be split accordingly.
What Are the Factors for Receiving a Bonus?
Before we determine how to calculate bonuses for employees, we need to understand the factors that contribute to their bonuses.
Factor 1: Personal Performance
Employees are evaluated based on their ability to fulfill or surpass the objectives set by their superiors. A soft skill that has a positive impact on the success of an organization can also be recognized through this type of compensation. Examples of soft skills include leadership, effective communication, problem-solving, and teamwork.
Factor 2: Company set goals
The following are the company's objectives: When determining an employee's bonus, the company's overall performance will be considered. Similarly, if an employee has a fantastic year but does poorly, the employee will not be eligible for the bonus. If contrary to popular belief, the company achieves its objectives. A greater incentive may be offered to the employees.
Factor 3: Paygrade
In general, if your pay is higher, you will be eligible for a larger reward. One employee at a company may earn $50,000 per year and be eligible for a 5 percent bonus, while another may earn $100,000 per year and be eligible for a 10 percent bonus. Senior employees may have a greater impact on the company's success than lower-level employees, which is reflected in salary increases for senior employees.
Factor 4: Sales Commissions
If you work in sales, commissions account for a significant amount of your income. These are sometimes referred to as "bonuses," but they are different from typical bonuses in that they are based solely on your sales figures and rarely on anything else. Depending on the company, individual sales bonus earnings may be capped.
Adding sales performance bonuses on top of commissions has become a popular incentive payment structure in sales organizations. Certain sales organizations compensate their personnel by giving them bonuses unrelated to their commissions.
Rather than depending on individual sales targets, some organizations place a greater emphasis on team sales objectives. In addition to your regular income, you would receive a share of any commissions earned by the team, as well as a bonus if available.
How to Pay Bonuses: With the Regular Paycheck Or Separately?
Because a bonus is a form of employee pay, it has to go through payroll. There are two ways to do it, and each has a different effect on how the incentive is taxed. The following are some other options that you could look into:
1. The bonus can be included in the employee’s regular paycheck. The bonus will be taxed with the rest of their income in this case.
2. The bonus can be sent as a separate check and taxed separately. Bonuses are taxed at a fixed rate of 22 percent for the first $1 million and 37 percent for the next $1 million and after that.
Are You Ready to Start Calculating Employee Bonuses?
Consider distributing bonuses quarterly or monthly as an alternative to a major annual bonus being paid out all at once. Shorten the relationship between actions, results, and rewards to make bonuses more relevant.
Employees with higher job performance ratings receive a greater share of the bonus pool, which can be determined by allocating a portion of the bonus pool based on performance. An entire department can be recognized in one lump sum, or individual employees can get recognition. The options are endless.
If you don't have the money for bonuses right now but still want to show your appreciation, start small. Commenting on something that doesn't make any sense can nevertheless be important. "Thank you" from the bottom of your heart is the best way to express gratitude. Be sincere and do your best.
Regardless of which bonus structure you set up, there’s an easy way to keep track of it: Lanteria’s HR Management software. To learn more about how Lanteria can streamline your organization’s bonus structure, reach out for a consultation.