Bonuses play an important role in employee retention and motivation, and businesses of all sizes need to understand what's right for them when it comes to bonus structure templates. In this article, we'll provide tips on how to create a bonus structure that meets your business' needs while also ensuring that your employees are happy and motivated
Bonuses are a surprisingly controversial topic in the workplace. Employees often complain that they're unfair or unnecessary, and managers frequently argue that bonuses motivate their employees to perform better. So what's right about these bonus structures? And more importantly, how can you use them effectively to boost employee motivation?
This article will help business owners understand the different types of bonuses available for small businesses, which is a critical factor when it comes to creating an effective bonus structure template. We'll also discuss why some businesses choose not to offer any form of incentive at all - instead of focusing on performance-based incentives - and explore whether a bonus structure is right for your business.
We'll also demonstrate how to create a basic bonus structure template and discuss the different types of bonuses available (e.g., salary, commission, performance-based incentives) as well as the importance of clearly communicating your expectations in order to ensure that employees are clear about what's expected from them when it comes to bonuses.
Finally, we'll provide tips on creating an effective bonus program that meets both employer and employee needs by ensuring that everyone shares equal responsibility for success at work.
Let's take a look at some of the most common types of bonuses that small businesses offer. To begin, let's first define what we mean by "bonuses." A bonus is generally any form of monetary compensation (e.g., salary increase, performance-based incentives) paid to employees as an extra reward for their hard work and continued employment with the company during a specific period.
Is Your Bonus Structure Effective? As you can probably tell from our discussion above, there are three main forms of bonuses: Salary increases (such as pay raises), commissions, and performance-based incentives. Each of these bonus structures can be effective depending on the type of business and what your company's goals are.
Alongside monetary rewards, businesses could also consider personalized rewards, such as custom trophies by Awards. Such tokens of appreciation offer a tangible reminder of the employee's valuable contribution, and may serve to further boost their commitment to the organization's goals.
Salary Increases: Salary increases or pay raises typically consist of a percentage increase in base salary for working additional hours or completing more work with the same level of effort as before (i.e., no decrease in quality).
In other words, you're basically receiving an extra payment for performing at a higher standard (and thus being paid according to how hard you've worked - not based on seniority) during that period instead of getting rewarded simply because it's your job to perform those extra hours or work more overtime.
Commission: Commission is a form of bonus that doesn't require you to be at your desk working additional hours, and it's usually paid out after the completion of some specific job-related task (e.g., getting referrals for clients).
With commission bonuses, most people earn their pay by meeting certain criteria related to sales volume over a certain period. If they don't meet these quotas, they won't get any money from this type of bonus. In our example above about acquiring new business, someone who was responsible for generating $10K worth of revenue in the next 12 months would earn a $1K commission bonus, even if they didn't make it happen.
Performance-Based Bonuses: Performance bonuses are also known as variable or discretionary bonuses because the payout depends on your level of performance and how well you've met certain goals during that period. The most common form of this type of bonus is one in which employees receive a portion (or all) of their pay based on what percentage growth has occurred within some measure over the course of an organization, such as net income.
This can be effective when done correctly - i.e., making sure that the bonuses are tied to specific goals and based on objective measures - but it's extremely difficult (and in many cases impossible) to do correctly without an ongoing relationship with a company.
A study showed that 88% of employees agree that it’s important that employers reward employees for great work and employee experience management platforms, like perkbox, can help in it.
The other key element in any bonus structure is the policy governing them. While they've evolved quite a bit over time, our basic definition of what constitutes an appropriate bonus plan still basically applies today:
What you're promoting (the type of thing that's incentivized) should be tied to some specific method or formula for measuring its success. This means identifying some performance criteria and then defining how those are measured.
For example, let's say your employer wants to promote 12% growth within net income, but it doesn't want employees who earn bonuses basing their compensation on goals like closing sales with new customers or reducing the number of customer complaints. Instead, it wants to use some objective measure (like a percentage) that can be used across multiple areas and over time.
To determine how much you're being paid based on this performance criterion, take your annual base compensation plus any other benefits in addition to bonuses and divide by the total possible payouts for all employees under this plan - i.e., everyone who qualifies for a bonus opportunity at least once during their tenure with your employer.
Then subtract out any salary increases or cost-of-living adjustments that are part of your employment package, as well as other bonuses that are tied to things like employee productivity, customer satisfaction or retention. You can think of this number - the annual base salary plus any benefits you're eligible for minus whatever is left over after taking those into account - as your "base" compensation.
When creating a bonus plan, ensure that all employees who meet the necessary criteria ( i.e., qualify to participate in an opportunity at least once during their tenure with your employer) will be able to receive some sort of award every year.
There should never be something where only managers and executives get paid whether they help achieve goals or not. If your company has a lot of part-time staff, you may want to consider using a different measure (like sales volume or customer complaints) instead of base pay and benefits.
Once the plan is in place, make sure it's communicated clearly across the entire organization - i.e., employees should know how much they're being paid, what performance criteria were used to determine their compensation and when bonuses will be distributed.
Bonus plans that are not transparent can create confusion within teams as well as lower morale by creating an "us vs them" atmosphere where some people feel like they don't have a shot at receiving any awards and others feel like they're being given unfair bonuses just for meeting some vague, arbitrary number.
Bonus plans can be used to motivate employees and reward them when objectives are met or exceed expectations. And while many employers are using these programs as part of their overall compensation strategy, it's important that all staff members understand how the program works, who qualifies to participate in an opportunity (i.e., what performance criteria were used) and when distributions will take place ( i.e., "at year-end" vs "every six months," etc.).
Lump-sum bonuses are one type of bonus plan that is used by many employers. Lump-sum bonuses occur when a certain amount and/or percentage of base pay is paid to an employee all at once, rather than over time (e.g., monthly, quarterly).
Frequently lump sum payments are distributed immediately after the end of each period which ends during the year or quarter in question. Some employers may also prefer to have employees use some portion of their cash compensation as they see fit (i.e., toward vacation days) before having it converted into a lump sum payment for distribution.
Variable pay bonuses are another form of cash incentive that is often used by employers to reward and incent employees. These types of bonuses require an employee's performance to be measured throughout a certain period in order for their compensation or award amount to be determined (e.g., quarter, calendar year, etc.).
The actual payment can occur at the end of each time period as well or periodically throughout the entire year/period, with some plans distributing all variable pay amounts in one lump sum on a date-specific upfront rather than at individual periodic payment dates during the course of the year/time period.
Stock options are another type of incentive that is used by employers to reward and incent employees. These types of awards can be granted in exchange for services provided over a certain time period (e.g., "at the end of this calendar quarter," etc.). Upon termination, stock option grants must then be either converted into cash or forfeited at the end employee has met all vesting conditions during employment tenure with the employer).
The actual value paid out as an award will depend on many factors; these include how long employees have been employed (i.e., vesting cliffs), the type of stock options offered, and whether employees have a vested interest in receiving additional grants for future employment (some option plans provide for automatic boosts to award amounts based on continued service).
Nonqualified stock options are similar to qualified stock options; however, these types of awards do not require that an employee be employed at the time an offer has been made or before they can receive compensation under such terms. In other words, NSOs allow employers to reward their staff without requiring them to first become employed by the company. As a result, NSOs are typically more expensive than qualified stock options.
Deferred compensation plans allow employers to implement an employee benefit plan that allows employees to defer some or all of their regular payments into one lump sum payment at the end of their employment term/service with the employer. This is somewhat similar to how many 401k and other retirement plans work; however, these types of programs also provide additional benefits such as tax-deferral opportunities when distributions are made from accounts held in accordance with IRS rules.
