Employees deserve more than just a salary. Therefore, incentivizing them with a bonus plan can be an effective method to boost productivity and motivation. This can include anything from sign-on bonuses to year-end bonuses, spot bonuses, holiday bonuses, and more. According to PayScale’s 2021 Compensation Best Practices Report, about 70% of companies surveyed provide variable pay or bonuses as part of a total incentives package. If you’re ready to reward your workforce more, today we will share about how you can create an employee bonus plan. Stay tuned!
Types of Employee Bonus Plan
What works for one company may not work for the other, so determine what types of bonus plan you want to implement for your company.
1 . Retention Bonus
A retention bonus is given to keep an employee after a merger, acquisition, or reorganization of the company’s management. Companies will offer a bonus to retain important employees during a transition period so they will not resign. Allocating a budget for this can actually reduce costs for new hiring process.
2 . Annual Bonus
An annual bonus is a bonus that is paid once a year, generally at the end of the fiscal or calendar year. This is done to reward employees for meeting specific goals. Employees may be given this bonus if the company meets its goals or targets.
3 . Referral Bonus
A referral bonus is a bonus that pays a current employee for referring a potential employee who is eventually hired by the company. Employee referrals are frequently the finest source of successful candidates, as they can vouch for people they know best. Thus, rewarding employees who suggest friends or their colleagues with a bonus is favorable.
4 . Ad hoc Bonus
When an employee goes above and above for a task or project, an ad hoc bonus is anticipated and given. This bonus is occasionally announced before the goal is reached, so employees will be more motivated in reaching a target. This is also offered to express appreciation after a successful achievement.
Other than the types of bonus plan mentioned above, there are also other types of bonus plan such as discretionary bonus, team bonus, and profit share. According to PayScale report, the most common forms of bonuses were employee referral bonuses, performance bonuses, and spot bonuses.
Essentials of an Employee Bonus Plan
Bonus plans or incentive compensation schemes are typically used to encourage production, efficiency, and commitment inside a company. If the company runs towards certain goals and wants everyone to work together to achieve those targets, they may opt to give additional incentives for achieving the intended result. According to research by Harvard and Yale, employers found that offering bonuses increases the overall productivity of their employees. Now, there are several things you need to consider in creating this bonus plan to ensure its effectiveness:
1 . Set your business goal
When establishing an employee bonus plan, the first thing to consider is the business goals you want to achieve. If your strategy does not motivate employees to work harder to achieve company’s goals, it may be a waste of effort. Begin by understanding your goals and develop a plan to encourage their success. Remain rational and realistic in setting this, so employees can get optimistic in working hard to achieve the goal.
2 . Know your financial constraints
It is not very wise to give away money that your company does not have. Consult this with the finance department to understand the company’s cash flow better. Refrain from giving bonuses to employees that do not reflect the value of their job. You must examine the appropriate bonus compensation for each position in the company and relate it to particular goals or performance that have a quantifiable impact on the business.
3 . Determine quantifiable outcomes
Bonuses should ideally be linked to clear and quantifiable outcomes. Plan ahead of time to anticipate if your aim or outcome is ambiguous or difficult to quantify. If you do not examine this, you risk of having a conflict with employees at the time of distributing bonuses. Make the criteria as detailed as possible to the best of your ability. There should never be any doubt regarding whether or not a bonus will be awarded.
4 . Understand your employees’ needs
A bonus plan is only effective if employees are interested in it. If you are motivating employees with financial bonuses, make sure the reward is substantial enough to stimulate their interest and keep them engaged. If you are rewarding employees with non-cash incentives, like vacation, PTO, and other supplementary benefits, determine whether they are motivated to work more as a response. Your bonus program will most likely fail if you do not understand your employees’ needs.
Creating a bonus plan is not a one-size-fits-all method. Your company’s bonus plan is unlikely to be the same as that of any other company. Evaluate combining several bonus types into your plan as you consider the various benefits described above. In the end, make sure your plan is in line with the company’s goals and financial condition, and that it is based on measurable, attainable outcomes.