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Employee bonus programs: What’s right for your company?


A thoughtful, high-value employee bonus program can help make the difference between struggling to recruit and retain talented employees, and having a workplace that employees never want to leave. That’s especially true in job markets that are tilted heavily in favor of job candidates.

But before you dive in and implement an employee bonus program, it’s important to consider your options, evaluate what’s best for your company and find what’s most valuable for your people. Here’s everything you need to think about at the outset of this journey, or if you’re in the process of reviewing existing plans.

Employee bonus programs defined

An employee bonus is a form of payment – most often monetary – in addition to an employee’s base pay. Employers usually offer bonuses to employees for a specific purpose (for example, to reward certain behavior or to recognize the achievement of established goals).

For employees, bonuses are very popular because they represent an opportunity to earn more money beyond what their salary or hourly rate dictates. Most people want more money if the opportunity presents itself, right?

How employers benefit

A well-structured employee bonus program may help your company:

  • Attract talented, motivated employees who want the opportunity to earn more
  • Reward top performers, thus inspiring employees to perform well
  • Promote desirable employee behaviors
  • Improve employee satisfaction, morale and productivity
  • Make employees feel valued and appreciated
  • Retain employees
  • Focus employees on organizational goals and individual goals, tying rewards to the achievement of both
  • Boost earnings, particularly when employee goals are aligned with what drives success for a business

For employers and employees, employee bonuses should be a win-win situation.

Types of bonus programs

There are many different options for employee bonus programs. These options can be implemented individually or in combination with each other.

Performance-based bonus

  • Focused on an employee achieving a specific goal or objective, or demonstrating a desired behavior in the workplace
  • Given over a designated period of time (e.g., annually, semi-annually or quarterly)

Spot bonus

  • Immediate (on-the-spot) recognition for outstanding contributions of individuals or teams
  • Based on direct observation or feedback from others
  • Quick way to say “thank you” without making employees wait for a longer period of time to receive a bonus

Sign-on bonus

  • Extra incentive for job candidates – especially those with high-in-demand skills and knowledge – to join your company
  • Given upon hire and not based on performance
  • Usually a lump-sum payment the employee receives on their first paycheck or after a brief period on the job

Retention bonus

  • Used to retain employees during transition periods to encourage them to stay
  • Agrees to pay an employee a pre-determined amount upon the occurrence of a specific event or date
  • Amount varies depending on the employee (e.g., role, seniority, performance or achievement of goals)
  • Usually a lump-sum payment (with the employee generally receiving the first half of the bonus on their paycheck beginning on a specific date, and the second half on another date designated by the company)

Referral bonus

Project-based bonus

  • Reward for teams or individual employees completing a special project on time, under budget and within performance criteria established at the beginning of the project
  • Based on project metrics
  • Given as a lump-sum payment to designated team members at the end of the project

Non-cash rewards

Creating and tailoring your employee bonus program

Your employee bonus program must align with your company’s business strategy and goals, as well as your compensation policy.

Additional considerations:

  • Your company’s culture as well as your mission, vision and values
  • Your expectations for what you’re trying to achieve
  • Your company’s particular situation – and what’s feasible and affordable for the long term
  • What your competitors and industry peers are doing
  • Economic conditions
  • The current job market

As you go through this exercise, also keep the following in mind:

1.      Understand what drives your employees

Don’t just come up with a bonus program that you would want as an employee or that you assume will work best. You’re not trying to motivate yourself, and your baseline for a good bonus program might not match that of your workforce.

Instead, approach the issue from your employees’ perspective. Consider what your employees – the recipients of the reward – want. What type of reward will be the most effective in obtaining the results you want for the company and keeping employees engaged and happy?

The bottom line: Any bonus program must be meaningful and hold value for your employees. Otherwise, a bonus program will be a waste of time, effort and money – and won’t produce the desired results.

Ask yourself these types of questions:

  • Is a year-end, once-per-year bonus enough to keep employees encouraged throughout the year?
  • Should you consider spot bonuses, or do your employees feel more comfortable with predictability?
  • Do your employees value time off and flexibility more than cash?

Solicit feedback from employees by asking them directly or issuing an employee survey on the topic.

2.      Clarify eligibility, requirements and frequency

For fairness and transparency, and to protect your business against adverse action from disgruntled employees, you must specify:

  • Which employees are included in the bonus program
  • Who is eligible for certain types of bonuses (if you offer more than one type of bonus)
  • Why certain employees are eligible for bonuses
    • Is it based on role, department, seniority or tenure?
    • Use concrete statements such as: “You must be a full-time account executive hired on or before June 1, 2021.”
    • Are employees who contribute directly and indirectly to goals included?
  • What the requirements are to achieve a bonus, and how performance and goal achievement will be measured
  • When and how often bonuses are distributed
  • The conditions under which an employee is no longer eligible for a bonus
  • Any other terms and conditions

There should be no ambiguity surrounding who did or didn’t receive a bonus, and why.

3.      Document your program

Much like other HR documentation, everything about your employee bonus program covered above should be put in writing – ideally, as part of your compensation policy.

A written explanation of your bonus program can serve as a handy reference for employees, should they have questions or concerns. After all, it’s a lot of information for employees to process and remember. You don’t want to constantly receive a flurry of emails in your inbox about bonuses.

It encourages clarity, transparency and consistency in implementation. Creating documentation eliminates surprises and confusion when bonuses are issued. Everyone has the same information at the same time, understands the rules and knows in advance what’s expected of them to receive a bonus.

Most importantly, it protects your business from claims of unfairness or discrimination.

4.      Communicate regularly about performance and goals

Communication of clear objectives from management to direct reports is crucial. Employees shouldn’t miss out on a bonus because of misunderstandings or lack of awareness about expectations of them.

This is particularly true for frontline supervisors managing employees who may not have access to technology to review performance assessments and progress toward meeting goals. As a general best practice, managers should schedule regular, one-on-one meetings with employees to make sure everyone is on the same page.

Summing it all up

An employee bonus program is one of the most powerful tools employers have to better recruit and retain employees while improving morale, satisfaction and productivity, and helping businesses achieve goals. There are many different types of monetary bonuses to choose from, in addition to non-cash rewards.

To be successful, an employee bonus program should align with business strategy and compensation strategy, along with other key considerations. Selecting and implementing a bonus program should also involve examination of employee preferences, clarification of eligibility, requirements and frequency of bonus distribution, documentation of the program and regular communication.

Ultimately, the best employee bonus program is the one that is feasible for your business over the long term and most effective for motivating your employees.

To learn more about employee offerings that can positively impact your workforce and company, download our free magazine: The Insperity guide to employee benefits.