A bonus system
is financial compensation, reward or return over and above the normal expectations of the recipient. In workplace settings, a bonus is compensation given to an employee in addition to his/her normal wage. A bonus can be used as a reward for achieving specific goals set by the company, or for dedication to the company – or even to join the company.
However, bonus system are payment system designed to increase production by the awarding of incentives to employees with methods of payment by results usually falling into one of the following categories: piecework, bonus work or contract work.
Piecework which refers to methods of payment in which certain price or rate is fixed for each unit or article produced, such price or rate determining an employee’s earnings in each pay period (according to the number of articles produced by the employee).
Bonus work which generally includes all methods of payment by which employees are encouraged to produce more than a specified number of items or perform more than a specified amount of work in each shift or other designated working period.
Contract work refers to the quantity of items or amounts of work which a competent worker, working at normal speed is able to produce in such working period is determined by production-flow analysis and special payments, in addition to the normal wage fixed for the time worked in the period in question, are made for each item or selected unit produced in excess of the determined quantity.
However, these payments may be calculated in relation to work performed by individuals or groups of employees. In the latter case the extra payments are divided in accordance with various methods among the employees in each group concerned.
Bonus structures in a company could be as follows:
- Sign-on bonuses for when new hires start
- Daily or weekly bonuses tied to sales goals
- Spot bonuses for recognizing people spontaneously
- Referral bonuses for referring new employees
- Anniversary bonuses for hitting a work anniversary
- Holiday bonuses to end the year on a high note
- Individual bonuses that go to one person only
- Company-wide bonuses that everyone on the team receives
- Annual bonuses which people get once a year
- Quarterly bonuses which people get after a four-month timeframe
4 Tips for creating an effective bonus structure
In order to create an effective bonus structure within a company, the following tips would help:
Firstly, Question yourself
Ask yourself about the reason why you want to give a bonus and focus carefully on what outcomes you want as a result of the bonus. With your desired end result in mind, decide on a payment structure by giving a bonus close to the time of achievement or result was reached.
Secondly, Pay along the way
Once you have your employees on board, incentivize them with small payments before the big money. Then identify measures of progress and structure the bonus to make sure there are payouts along the way—it keeps people going.
Thirdly, Make it attainable
There’s nothing worse than reaching for a goal and coming up short. However, business owners make goals tied to bonuses contingent on a single employee’s achievements, not relating to others. Also ensure the desired performance is under the employee’s control, don’t make the bonus contingent upon results or behaviors outside of their control. Moreover, it is important to make the desired outcome or project challenging—not too easy or difficult.
Fourthly, Consider collateral issues
You want to land new business, so you set up a bonus enticing employees to bring it in. There are other things to consider. If you offer a bonus to sales people for bringing in new customers, they will do just that. Also, please consider collateral issues and be specific in exactly what you want from your employees.
Necessities of bonus structure in a company
From spot bonuses to performance bonuses, tacking money onto employees’ paychecks can do a lot of wonder. Here are the biggest reasons they’re important:
Motivates the team: When people have something to work toward, regardless if it’s an individual or company-wide objective, it can incentivize them to accomplish it.
Attracts quality talent: If you’re trying to close a candidate, offering a signing bonus can be a great way to put the finishing touches on an offer.
Improves morale: When people are bogged down, ushering in a bonus program can help give people a pep at work.
Brings you closer to success: This is the heart of it all. When people earn bonuses, it’s usually because they knocked something out of the park. You want that to happen, over and over again. Because when your employees shine, so do you.
However, keep in mind that a bonus program is usually just one sliver of the motivation pie. Things like ensuring employees have a purpose, investing in personal and career development, and recognizing the team in a variety of ways should also be woven into your tool belt.
A company should focus on the following prior to bonus declaration which is given below:
Employee bonuses are a great incentive for employees, but before you decide to hand them out, be sure you know the tax implications first – to your business and your employees. Just to be clear, a bonus is a special one-time or annual payment to an employee for some special purpose. The bonus is an additional payment beyond the salary or hourly rate of pay for the year.
Deducting Employee Bonuses as a Business Expense
If you have some cash and expect to make a profit this year, it’s a good time to pay bonuses to employees. In addition to receiving a tax deduction for these benefit expenses, you also receive much goodwill from employees, especially around the holidays.
Bonuses are a deductible business expense, in the category of “payments to employees.” If you give bonuses to some employees and not others, make sure you have a clear rationale for this difference. You may want to give performance-related bonuses, tied to evaluations.
Bonuses to Employee/Owners
Employee/owner bonuses are a legitimate business expense and can be deducted under certain circumstances.
S Corporations can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.
C Corporations can only deduct bonuses for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.
Bonuses and Overtime
Bonuses can be discretionary (at the discretion of the employer) or non-discretionary. It’s important to know the difference, because non-discretionary bonuses may need to be included in overtime pay calculations.