A performance bonus is an extra monetary award that employees receive for meeting or exceeding specific goals and is provided on top of the base salary or wages.
Employee bonuses can be based on individual performance, but they are also given to teams working towards a singular goal.
Types of performance bonuses
Here are the types of bonuses that you can provide your employees.
Discretionary bonus
Discretionary bonuses are discretionary awards given to employees for doing an excellent job for a certain amount of time or making a huge advance in their career. The management will give such bonuses without notice and employees typically don’t expect them. The amount of money awarded to the employee stays a secret until the official announcement.
Non-discretionary bonus
Unlike the previous type, non-discretionary bonuses are made known to employees and are used to incentivize them to perform at the top of their capabilities. The workers know exactly what they need to achieve to be eligible for this bonus. There’s usually strict criteria for choosing one or more employees to receive a non-discretionary bonus.
Spot bonus
A spot bonus is given to an employee “on the spot” without establishing clear and airtight eligibility criteria. The bonus is tied to a recent achievement that’s obviously contributed to the company goals. Managers can nominate their team members for this bonus.
Mission bonus
Mission or milestone bonuses are based on accomplishing tasks, usually very important ones that come with tight deadlines. For example, if an IT team finishes installing new software, they may be awarded a mission bonus. You can also give a contractor this bonus under certain conditions.
Profit-sharing bonus
Profit-sharing bonuses are incentives given to employees for a business's success. Companies divide a percentage of net profits with the employees as a sign of appreciation, on top of their base salary. This type of bonus can have a significant impact on creating a positive company culture and foster the sense of contribution among employees.
Non-cash bonus
A non-cash bonus is given to employees for the same reason we mentioned above—exceeding performance expectations and achieving important goals. However, it’s not a monetary bonus, although it has monetary value. Non-cash bonuses often come as gift cards or vouchers.
The benefits of offering a performance bonus
As an employer, you can run a bonus program to show you appreciate the job your employees do. You get to recognize high-performing employees and boost morale and engagement within the organization.
You can also provide incentive bonuses to encourage your employees to perform better and get better results. An employee who knows they can earn extra on their regular salary for a little more effort will try to achieve higher productivity.
Bonuses can also be a part of your talent acquisition and retention strategy, as they make your total compensation competitive.
How to determine the amount of bonus to offer
There are three ways to calculate bonuses for employees:
- Sales commission: This is as easy as multiplying the commission percentage by the total sales. To determine a fair commission percentage, consider factors such as the employee’s involvement in the sales process, the value of their role, and the price of your product.
- Percent of salary: When dealing with full-time employees, you can offer bonuses based on their salary. Simply multiply the end-of-the-year bonus percentage by their salary.
- Sign-on bonus: This is usually a flat rate lump sum fee, but if you intend to pay it in installments, divide the amount by the number of desired installments. You should also remember that bonuses are taxable.
How to implement performance bonus in your company
Here are the steps to successfully implement your performance incentive plans:
Define criteria
The human resources department should formulate a way to assess employees for performance bonuses and ensure that managers and employees comprehend it. As a result, everyone will be equipped with the necessary information to strive for better performance.
Train managers as coaches
Managers are crucial in ensuring that employees are motivated and perform at high levels. So, ensuring that your managers are educated as good coaches can improve your employee’s performance and, consequently, your company's performance.
Let the employees participate in target-setting
Allowing your employees to participate in target setting lets them quickly and easily prepare and accept the new challenge. Employers have direct insight into what their employees consider an attainable goal.
Have a consistent payday
A regular pay period when HR evaluates performance and offers bonuses will help employees know when to meet deadlines to qualify for the award.
Match performance goals to company goals
Employees become more motivated when they see that their performance bonus goals contribute to the overall business goals.
Pay your bonuses with Deel
Offering bonuses is a great way to motivate and incentivize your employees to improve. As such, the process should be carried out with minimal payment mistakes to ensure the employees get their correct payout on time. To pay your distributed workforce correctly and on time every time, you can use a global payroll service provider like Deel.
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