A performance bonus is a form of additional compensation paid to an employee as a reward for achieving specific goals or hitting predetermined targets. A performance bonus is compensation beyond normal wages and is typically awarded after a performance appraisal and analysis of the designated work completed by the employee over a specific period of time. Here is everything you need to know about Performance Bonus including why companies offer them, are they a guaranteed thing, related examples and more.
How Performance Bonuses are offered?
Not all companies offer bonus plans and those that do often define the maximum amount that an employee can receive for exemplary performance. Companies that use an appraisal or employee review process may set a score threshold that an employee will have to meet or exceed to be considered. Because this bonus is given for performance above expectations, employees are not automatically entitled to it.
The inclusion of performance bonuses may be used as a way to make the position more attractive to potential hires. Even if an employee is not guaranteed under contract to receive a performance bonus, they may be instituted at the direction of the employer. Performance bonuses may be instituted regularly, such as annually, biannually, or monthly. They might also be made available only for specific periods, perhaps to drive extra effort for a particular project or a critical sales quarter.
Why Do Companies Provide Bonuses?
The main reason employers are drawn to bonuses is because they encourage employees to work hard to help the company succeed. People who know they can make more money by bringing in more revenue, whether directly (like sales) or indirectly (like marketing or executive leadership) are highly motivated to do so.
When a company does poorly because of poor performance, the employee pays the price with lower compensation—as opposed to someone with no bonus structure who gets paid the exact same way no matter how well the company does.
What can companies do to ensure effective implementation of Performance Bonus?
Companies can incorporate these steps to create a dynamic performance bonus system:
Define criteria
The organisation should establish the criteria they’ll be using to assess employees for performance bonuses, and ensure that managers and employees understand it. Explaining the criteria to both provides each with the necessary information to do their jobs to the best of their ability.
Train managers to coach employees
Because managers play a vital role in employee engagement, educating them to become effective coaches can directly enhance employee work performance and in-turn advance the company.
Inviting employees to take part in target-setting
Organisations can invite employees to help establish attainable performance bonus goals. There is a higher probability that employees will better grasp the tasks ahead of them and have the motivation to accomplish these tasks if they participate in the goal-setting process.
Offer performance bonuses consistently
Performance bonuses should be granted according to a consistent timeline. This way, employees can plan accordingly to meet deadlines and increase their chances of qualifying for a performance bonus.
Is Performance Bonus a guaranteed thing?
The answer is no. Most bonuses are discretionary and an addition to your salary, making it practically impossible to force companies to provide them. And there’s no real law that states you have a right to a bonus. Unless you have it mentioned in your offer letter or some legal document, there is no guarantee that you will be given a bonus.
Examples of Performance-Based Bonuses
Performance-based bonuses are incentive systems for a company’s employees that tie personal and teamwork efforts to financial rewards for the individual employee and team.
Some performance-based pay examples include:
- Individual effort bonus
- Team play bonus
- Holiday treat bonus
- Goal-achieving bonus
For those companies that reward performance-based bonuses, the chosen structure is often toward compensating single employees. When a company gives a bonus to an individual, it’s usually a taxable, one-time payment that shows the manager or company executive recognizes the employee’s extra effort.
In reality, a performance-based bonus can not only recognize individual performance by an employee but can also be awarded to a work team, a company region or the entire organization.
Frequently Asked Questions (FAQs)
How do performance bonuses work?
A performance-based bonus is an extra compensation granted to an employee as a reward for reaching pre-established goals and benchmarks. Employers often reward employees with performance bonuses after evaluating outstanding projects or high-quality work performances.
How much is a performance bonus?
A company sets aside a predetermined amount; a typical bonus percentage would be 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary. Such bonuses depend on company profits, either the entire company’s profitability or from a given line of business.
Why is a performance bonus important?
Bonus pay is also offered to improve employee morale, motivation, and productivity. When a company ties bonuses to performance, it can encourage employees to reach their goals, which in turn helps the company reach its goals.
Are bonuses taxed higher than salary?
While bonuses are subject to income taxes, they don’t simply get added to your income and taxed at your top marginal tax rate. Instead, your bonus counts as supplemental income.
Are bonuses required by law?
Bonuses are not required by law, so whether they are required to be paid at termination depends on the unique circumstances involved and the terms of payout included in the bonus plan. When terms of payout are defined, the employee may forfeit a bonus under certain circumstances.