All employees love receiving a bonus from their employers because there's hardly a better way an employer can respect and pay back for an employee's efforts (or a group or team).
Bonus is the additional amount of money that is an incentive for performing one's job successfully. The bonus is typically a part of pay for the employee. It's an expression of appreciation by the company towards its employees.
Bonuses are offered globally in the majority of companies across various countries. It's not just given for a job well accomplished. However, it is also a way to maintain employees focused and motivated.
Did You Know?
The least bonus of 8.33% is what a company can pay no matter which industry it is. Also, as per section 31A of the Payment of Bonus Act, the minimum productivity bonus that’s linked with the bonus you're giving can be paid in any accounting year. However, it must not exceed the maximum amount of 20% of the entire salary of the employee you’re going to the bonus to.
Also Read: What is Retention Bonus? Meaning, Examples, Agreement & Rates
What Is a Bonus?
The term "bonus" refers to "a kind of compensation that isn't guaranteed and is typically paid upon the end of a particular day/task/milestone. They come in various forms and sizes. However, generally, they're performance-based.
That means the company awards according to how an individual (or group of workers) contributes to the team or corporate goals. Typically, they're revenue-based.
A lot of bonuses are discretionary. Instead of having to be tied to a certain amount, level, or performance, the manager determines who's qualified for a bonus and how they will pay for it.
Types of Bonus
Now that you know the bonus definition let’s look through the types. There are many types of bonus schemes. Understanding each type will help you choose the right one for you. The types of bonus schemes will depend on the type of company, industry and position you want to work in. This article covers these common types and how they are applied in practice. Here are the types of bonuses for employees:
Profit-Sharing Bonus
A profit-sharing bonus is a form of employee compensation in which an employer contributes a fixed percentage of its profits to an employee's benefit plan.
- Typically, the bonus is given out annually, but companies can make payments more frequently.
- Profit-sharing plans are not required by law, and companies are free to decide whether or not to offer them to their employees.
- Some profit-sharing plans allow businesses to contribute the bonus to an employee's retirement account or split it into two instalments over two years.
- Although profit-sharing is becoming increasingly common in large companies, many employees are still suspicious of the system. This is because the apportionment of profits is not transparent to employees, and employees may question the motives of their employers.
- Another concern is the amount of time that elapses between bonus payments. This can prevent employees from sustaining interest in the accrued profits over an extended period. Profit-sharing schemes also tend to be a risky proposition.
Spot Bonus
There are different types of spot bonus salaries. They include cash bonuses, peer-to-peer bonuses, spontaneous payments and more.
Supervisors often grant spot bonuses, but self-organised companies can offer peer-to-peer bonuses. This type of bonus allows employees to propose to their colleagues for special payments. In the Swiss insurance company, the possibility of allocating spot bonuses without the supervisor's approval was offered.
- Managers need to avoid giving bonuses with arbitrary values, as employees might expect the same value from future spot bonuses. Not meeting these expectations can demotivate the employees.
- Ideally, the spot bonus should be based on employee performance and behaviour.
- Spot bonuses are given to employees when they go above and beyond the call of duty.
- These bonuses are intended to boost morale, show employees that they are valued and encourage initiative.
- They are tied to a specific task or performance, not part of their core job description.
Non-Cash Bonus
A non-cash bonus can be a certificate, trophy, or a special intra-company award feed. For example, you could give an employee of the month award. You could also have their supervisor nominate them for the award, which would foster teamwork. This type of reward is cost-effective and will help you show your employees that you care about them and their hard work. However, there are some disadvantages to this type of award.
- Before deducting non-cash bonuses from employees' paychecks, it is important to calculate the fair market value of these items. You can then deduct the amount of non-cash compensation from employees' wages.
- This type of bonus is also important to include on the employee's W-2 form, which shows employees' wages. It is important to note that non-cash bonuses are not always taxable.
- However, some employers make them a permanent benefit for their employees.
- Although cash bonuses are a powerful motivator, they are also subject to tax and National Insurance.
- Although cash bonuses are taxed at the same rate as regular pay, many employees prefer the tax advantages associated with non-cash rewards.
Also Read: What Is ESOP - Taxation & Benefits of Employee Stock Ownership Plan for the Employers
Referral Bonus
If one employee refers the company to any new hire, they enjoy a referral bonus. Companies aren't tied up to pay this bonus. The rules change from company to company.
In some cases, the employee enjoys an instant referral bonus, while in some cases, the referral needs to complete their 90-day probation period.
This bonus structure greatly helps companies save money while finding new talent, and if the right employees come in, it supports the company's success. You must ensure your employees know the program to make referral bonuses a success.
- To encourage employee referrals, make sure your employees understand how referral bonuses work when they are paid, and the criteria for qualifying.
- A late payment can deflate employee morale and disengage them from the program. To avoid this, create clear documentation and provide employees with a clear explanation of the referral criteria.
- Give employees plenty of talking points and content to share with their friends and colleagues to keep their company's brand identity in mind.
- To be eligible for a referral bonus, tell the employees that they must meet certain agency requirements. the candidate should not have worked for your company before. It also must be an openly advertised position.
- During the waiting period, you must have a good relationship with the candidate established between the two.
Signing Bonus
A signing bonus is a payment given to a new employee. It's important to note that this is part of the employee's contract, and it should be stated in writing.
The contract should specify the payment terms, including the length of time an employee must work for the company before the signing bonus can be received and the method for requesting it. It should also state whether the bonus is refundable if the employee leaves the company before a year's worth of service is completed.
The signing bonus amount is typically based on industry norms, and it can also be negotiated with the new employee. Signing bonuses are generally more substantial for executive or higher management positions, but they are also available for clerical roles.
Milestone Bonus
The term Milestone Bonus refers to a bonus awarded to employees who reach certain goals. The bonus amounts are usually fixed at a certain level of achievement and do not vary from employee to employee.
For example, an Account Executive is entitled to a ₹10,000 bonus for meeting his monthly quota. A Sales Development Representative may earn a ₹10,000 bonus for setting 20 meetings in a month. A content writer may earn a ₹10,000 bonus for completing 25 articles. The same rule applies to other categories of employees.
Also, if, as an employee, you have good communication skills, you can fix some good deals with other companies that bring good profit to the company. It’ll lead to a greater bonus.
Project Bonus
Traditionally, bonuses for project managers were based on the total result of a project, but in recent years, the project bonus scheme has evolved. Rather than rewarding individual project managers, it is more appropriate to reward the team.
These bonuses can help motivate team members to work collaboratively to reach the company's goals. But they also face strong resistance. Quality-based bonuses are common in the production industry because the results are easy to measure. However, the service industry is also increasingly turning to project bonus schemes.
For example, a project manager's accuracy level is measured, while success factors are measured by surveying customers. This way, the manager can be awarded based on the higher of the two calculations. Increasing profits is one way to boost project profitability.
Annual Bonus
An annual bonus is a supplemental cash payment that is sometimes tied to company profitability. The amount may be as much as 50% of the employee's base salary, and the Company's Board of Managers decides the final bonus amount.
The final amount of the bonus depends on the employee's performance and the achievement of the company's goals. Employees awarded a bonus may receive it in cash or stock, but it is not mandatory.
Conclusion
So, an employer can present many types of bonuses to the employee or a team. However, the employer needs to stay honest and genuine while giving bonuses. Only those shall get it who deserve it! Once you bring a good strategy, there are high chances of receiving a bonus as an employee. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
