Bonus or incentive pay is compensation over and above base salary and is a reward to employees or to a team for achieving certain goals. Bonus pay can be used to improve morale, motivation, and productivity. Not all bonus plans achieve what they set out to accomplish. Therefore, it’s important to analyze the advantages and disadvantages of various incentive plan components to determine the plan that will be the best fit for your organization, the specific department, team and employees being rewarded. For example, you will want your plan for your sales employees who work with customers and are responsible for company earnings targets to promote high levels of performance as well as encourage ethical behavior.
Though the terms commission and bonus are often used interchangeably, there is a difference. Commission is a percentage of a sale. Commissions are often used for sales scouts or business developers. Payouts are typically monthly. Bonus is an incentive paid for meeting performance criteria against a specific goal.
There are several types of bonus programs. Some plans give employees a share of the company profits regardless of individual or team performance. Other programs give incentives to individuals or teams to perform at or above certain thresholds. Below are some of the common types of bonus plans.
Profit Sharing is a basic type of bonus program. A company sets aside a predetermined amount for a bonus dependent on company profits. The purpose of profit sharing bonuses is to engage employees in a more active role in understanding how their work affects the company’s performance and profitability.
Gain Sharing bonus programs are most common in manufacturing and are designed to reward productivity and improved product quality.
Spot Bonus Awards reward employees on the spot for achievements that deserve special recognition. Spot bonus awards are typically $50 and up and can be made by the immediate supervisor and any higher-level person or peer in the company. You can get these for just being extra helpful.
Noncash Bonus Programs are special recognition programs such as ‘employee of the month’.
Sign-On Bonuses are commonly used for new employees joining the company and often serve to add compensation for the first year without increasing the base salary level.
Mission, Task or Milestone Bonus are given as a reward for special achievements and are usually offered sparingly.
Referral Bonuses are paid to employees who refer friends and former coworkers for open positions. The referral bonus is typically paid only if and when the referral is hired.
Retention Bonuses are given to employees in circumstances, such as a merger or acquisition, to provide continuity through a certain time period when there is potential uncertainty about an employee’s continued employment at the company.
Holiday Bonuses typically range from small gifts to one month’s salary. This practice is not a true bonus since no performance is required to receive it.
Sales Commissions are awarded to salespeople for selling. Typically these awards are paid out as a percentage of sales volume.
Bonuses can be discretionary or non-discretionary. Discretionary bonus plans give no ‘promise’ of payment to the employee. The most common example of a discretionary bonus is the holiday gift, such as the classic holiday turkey or more common today, the gift card. In order for the bonus to qualify as discretionary, the employer must maintain complete discretion over whether any payments will be made and, what amount, if any, will be paid to each employee. Discretionary bonuses cannot be tied to performance or goals of any kind and should be announced just prior to payment. Also, if a bonus qualifies as discretionary, it does not have to be included in the overtime calculation for non-exempt employees. When a non-discretionary bonus is paid to a non-exempt employee, under the Fair Labor Standards Act (FLSA), the employer must generally count the bonus pay in the employee hourly rate when calculating overtime pay. Be aware that if an employer regularly provides a “discretionary” bonus such as the ‘year-end’ bonus and the amount of the bonus varies little from year to year, this may inadvertently create a non-discretionary bonus plan. Please refer to federal and state wage and hour regulations for detailed information regarding what can qualify as discretionary versus non-discretionary. Additionaly, employers should carefully craft and implement bonus plans with the assistance of counsel and be certain to clearly communicate the bonus plans to employees.
Bonus plans are also a key part of your compensation package and are important for maintaining a competitive advantage and being able to recruit and retain key employees. At WageWatch our compensation consultants can assist with your organization’s compensation needs and help you ensure that your bonus plans and compensation programs are supporting your company’s business strategy and objectives. WageWatch also offers accurate, up-to-date benefit survey data, market compensation data and salary reports that will allow you to stay current with the times. This information is highly beneficial in creating the best salary and benefits packages that meet or rival the industry standards. For more information on our services, including consulting, salary survey data, benefit survey data and market compensation reports, please call WageWatch at 888-330-9243 or contact us online .