What You Need to Know About Bonuses

Year-end bonuses are around the corner! – What you need to know about Bonuses:

Bonuses are a way for employers to recognize and reward employee accomplishments in a monetary form. They can become an integral part of a company’s compensation package and help tie pay to performance. Bonuses can include performance awards, gain-sharing systems, and profit-sharing. While they are generally for rewarding performance, awards are not always in correlation to job performance.

There are also various legal and tax considerations for employers giving awards and bonuses to their employees. Promising bonuses may be construed as contracts, while the Fair Labor Standards Act (FLSA) requires employers to count nondiscretionary bonuses in an employee’s regular pay rate.

Why offer bonuses?

While some bonuses can be entirely gratuitous, there is an element of gift-giving in all of them. Employers that award bonuses may receive certain practical and tangible benefits in return. A bonus is an expression of goodwill from employer to employee.

Type of Bonus Payments:

Performance Awards

These can be given for specific, individual, or group achievements and are common to use when establishing incentives to fulfill particular organizational goals. They range from large payments made to high-level executives who have achieved objectives to inexpensive gifts awarded to employees for exceeding defined targets.

Gain-Sharing Systems

This plan is a group incentive that encourages employees to improve productivity through more efficient use of resources. Then shares the resultant savings between the company and employees according to a formula. These awards typically reflect the profit margin or savings realized through an individual’s or a group’s efforts. Although it can be challenging to develop a fair method of calculating the gain, these bonuses offer strong team performance incentives.


A profit-sharing plan is a group incentive plan that includes all employees in an organization. It focuses on overall business unit profit or a similar bottom-line financial goal. These programs provide a financial safeguard for funding by ensuring payouts are not given until achieving a general profit level. They also provide an opportunity to train employees on financial measures and business factors that affect those measures. Generally, these payments are going to all employees having the requisite seniority, not just to particular workgroups.

Sign-On Bonuses

Many employers pay sign-on bonuses to attract needed workers, especially hot-skills workers. Sign-on bonuses can offset demands for higher starting salaries and leave the company’s base compensation program intact. In some industries and professions, employers are must pay dividends to compete for workers. Sign-on bonuses also can induce workers to relocate to less desirable parts of the country. They can be useful with college graduates as part of an attractive package that beats competitors’ offers.

Sales Team Incentives

Sales team incentives should be linking directly to the company’s marketing strategy to control their outcomes. Thus, encouraging the sales force to grow new accounts and support existing accounts. As the marketing strategies of individual companies are unique, so are the best sales compensation programs. Sales compensation should adjust periodically to support new marketing plans as its product mix or product life cycles change.

Bonuses vs. Awards

Some bonuses target achievements that are not directly concerning job performance and are considered awards. The following illustrate some of the more common awards for accomplishments in the workplace.

  • Attendance awards – these awards go to employees with outstanding attendance records
  • Recognition awards – employees often go above and beyond the call of duty
  • Referral awards – employers wish to take advantage of an employee’s contacts
  • Safety awards – these are a useful incentive in motivating employees to work safely
  • Suggestion awards – in the form of a percentage of the savings resulting from the suggestion.

A well-functioning bonus program can yield increased productivity, improved morale, a safer workplace, and numerous other benefits. To get the most out of any bonus plan, consider the wording, implementation, monitoring, and reviewing.


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