The Ultimate Guide to Employee Bonus Programs

Employees deserve meaningful recognition beyond their paycheck. From sign-on bonuses to year-end, spot bonuses, holiday bonuses, and more -- here's everything you need to know about employee bonus programs.

 
 
 

What are employee bonuses?

Bonuses are an additional form of compensation, beyond salary, given to employees to recognize and reward them. Bonuses can be cash, gift cards, allocated to perk stipends, or other gifts like movie tickets.

There are multiple kinds of bonuses. They can be awarded as a signing bonus, a one-off incentive for a job well done, or celebrating important milestones as an employee, such as a work anniversary. 

Also, it's important to acknowledge that while bonuses are an excellent method of recognizing and rewarding team members' efforts, they do not take the place of effective leadership and intentional company culture. Employee bonuses can complement those efforts when used correctly.

 
 

What are the different types of bonuses?

What comes to mind when you hear "employee bonus"? Lots of things may come to mind as there are many different types of bonuses that can be given to employees.

Sign-on bonus

A bonus given to employees for signing as an employee to your company.

Referral bonus

A bonus given to employees who have referred a candidate who was hired by your organization.

Spot bonus

A bonus given to employees "on the spot" or ad hoc for various reasons including winning a competition or a job well done. According to Salary.com, spot bonus awards are typically $50 and up.

Retention bonus

Also known as a "milestone bonus," it's a bonus given to employees recognizing work anniversaries, birthdays, or significant life milestones such as getting married or becoming a parent. These types of bonuses are often made up of year-end lump-sum payments used to reward an individual for hard work, goals achieved, or length of service.

Profit sharing bonus

Simply put, these bonuses are awarded based on how well the company performs as a whole. A typical profit-sharing bonus would be 2.5% to 7.5% of payroll, and bonuses might be given across the board or in larger proportions of compensation for high earners within your organization. 

Incentive bonus

Another way to reward stellar performance is with incentive bonuses, which can be individual or team-based. Individual incentive bonuses might be tied to performance goals, remembering that effective bonuses aim to reward exceptional behavior and not just meeting expectations. Employers can offer team bonuses instead of or in addition to individual incentives, with bonus amounts tied to measurable KPIs for collaborative efforts.

Year-end, holiday, or year-end bonus

Usually made up of year-end lump-sum payments used to reward an individual for hard work and goals achieved.

As with any form of compensation for employees, it's important to account for taxes when giving bonuses to employees.

 
 

How to know which bonuses are right for your organization

different types of employee bonuses

Deciding which types of bonuses to offer depends on several factors, including your company’s budget, your employee engagement goals, talent acquisition/retention challenges, and more. If you’re starting an employee bonus program for the first time, it’s best to start somewhat small with just a few different types of bonuses, as it’s easy to scale up once you get the hang of things.


When you might want to use sign-on bonuses

No longer a bonus reserved for just the C-suite or Wall Street, sign-on bonuses are being used by tech companies to fill the roles which are most difficult to hire. If you have a candidate or a particular department where prospective candidates are often on the fence (due to hyper-competitive industry), a signing bonus might be the extra nudge your candidate needs.

As discussed by Jason Pankow in The Art of the Sign-On Bonus, companies might consider offering a sign-on bonus for the following reasons:

  • To bridge a gap. If what the candidate is asking for and what you are willing to offer is off by a few grand, this is a swell way to make up the difference.
  • To be competitive. If the candidate is considering another offer that is comparable or even higher than yours. Some money up front can be enticing.
  • To cover a performance bonus. Often, when interviewing, candidates won’t want to leave their current company until a certain time so that they can first collect their annual bonus. If we throw out a sign-on, we don’t have to wait for that.

Example: Amid the talent shortage, AT&T is paying sign-on bonuses ranging from $3,000 to $10,000, varying by position and geographic location.


When you might want to use referral bonuses

Often, when talent is scarce, many employers use recruiters to find candidates. These recruiters typically make 20 to 30% of the new hire's first-year pay. Instead of paying this money to an outsourced recruiter who may not know your culture or business model, employ your employees to help provide referrals they know to work at your organization.

Referral bonuses can range from a couple of hundred dollars to thousands, depending on the difficulty of hiring the role and the seniority of the hire. 

Example: Your company might have a standard year-round referral bonus for all positions and occasionally decide to offer additional bonuses for referrals to hard-to-fill positions. Some companies are doing that now amid the talent shortage, offering 4x their normal bonus to get back to adequate staffing levels.


When you might want to use spot bonuses

Spot bonuses are excellent for "on the spot" incentives.

The example situations where a spot bonus would be fitting is typically tied to exceptional employee has performance on the job, such as if they filled in for a struggling colleague, achieving a very challenging but important goal for the business, or even by living the company's values. The average spot bonus amount highly varies depending on multiple factors such as the reason for the bonus and the seniority level of the recipient, but it can typically be anywhere from $50-$300.

Example: PwC issued spot bonuses equaling one week’s pay to all employees to acknowledge their hard work during the transition to remote work due to the pandemic.

Looking for an employee spot bonus software solution? Compt can help!

 
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Rewards to celebrate your team's successes

Send employee spot bonuses in just a few seconds making your recognition easy and meaningful.

 
 

When you might want to use retention bonus

As we mentioned earlier, retention bonuses can also be known as milestone bonuses. Companies often offer these rewards to employees who either reach a specific milestone anniversary at your organization (i.e. annual hiring anniversary) or to keep employees at your organization after an acquisition, merger, or organizational restructuring.

Culture thought leaders (like HubSpot) are offering retention bonuses with more than just money. Some companies are partnering financial rewards with sabbaticals and other attractive perks to create highly compelling reasons for employees to stay at their company longer.

Example: Retention bonuses can help in industries with high resignation rates, like healthcare. Chemed Corp. offered $2,000 to $15,000 per licensed healthcare professional for 12 months of continuous employment, amounting to a $44 million investment.


Other types of employee bonuses

As people operations professionals become more strategic partners of the business, the ability and desire to innovate on old or outdated HR practices have grown tremendously. There is no limit to the types of bonuses we can dream up or the ways they can be offered. The bonus types we discussed above cover the most common options, but you should feel free to let your creativity be your guide. After all, nobody knows better what will work for your organization—and your people—than you and your team.


Why developing an employee bonus plan is good for business

According to PayScale's 2022 Compensation Best Practices Report (CBPR) report, most (79%) of organizations offer some form of variable pay, up from 70% the year before. If you're not yet offering some sort of employee bonus program, it’s well worth adding to your people strategy as a way to compete for—and retain—top talent.


Here are some of the key reasons so many companies are adopting bonuses:

  • Tool in the HR team's toolbox. HR managers' main goals are to empower and support employees to be their happiest and most productive selves, and bonuses are a great way to celebrate excellent behavior and work.


  • Stand out in a highly competitive labor market. “In the same way the pandemic forced organizations to rethink their hesitancy around remote work, today’s labor market is prompting executives to reconsider their approaches to attraction and retention,” said Jessica Knight, VP, Research, at Gartner. “They are considering bolder moves around compensation/benefits, talent sourcing and role design in the face of aggressive compensation offers from competitors.” Employee bonus programs support current employees while simultaneously signaling to candidates that the employer cares.  


  • Employee bonuses can be a powerful incentive that aligns with company values and culture. Bonuses can be tied with work anniversaries, achieving a milestone at work, or awarded for demonstrating company values, making them multi-functional tools in the HR team's toolbelt. Because you can create bonuses around whatever milestone or behavior you wish to encourage or reinforce, they work as an excellent way to incentivize more of the actions you want to see.


  • Variable bonuses keep things exciting. Ever wonder why subscription boxes like Birchbox, Stitch-fix, or Purple Carrot are so popular? Research shows it's partly because of the element of surprise. Just like with slot machines, if bonuses aren't 100% predictable, it keeps things interesting, which could help boost employee engagement.
 
 

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The Dos and Don'ts of Bonuses

As with many compensation best practices, it's critical to begin with the right intentions in mind. Just like offering perks that keep your employees in the office longer is a maleficent approach to offering perks, the same thing applies to bonuses.

The list of do's and don'ts for bonuses best practices a long one, but we've compiled a list of the most significant things to consider when instituting a new bonus program at your organization below:


Don'ts:

  • Don't rely too heavily on them. They aren't mean to take the place of your company's mission, vision, values, or meaningful work. 
  • Don't give out bonuses haphazardly. This can cause confusion as to what behavior is rewarded, lead to unintentional favoritism, and ultimately loss of trust amongst team members and in leadership.
  • Don't give awards for best attendance or the lack of sick days taken.


Do's:

  • Do create your spot bonus program around organizational goals, culture, and success metrics. Additionally, link rewards to organizational success. 
  • Do make the criteria for receiving or winning a spot bonus clear.
  • Do make sure you're rewarding exceptional behavior that goes above and beyond, and not work that is expected.


Do make sure you reward behavior immediately and with an appropriately-sized reward. As with many compensation best practices, it's critical that you begin with the right intentions in mind. Just like offering perks or bonuses that physically keep your employees in the office longer is an ineffective approach to building a healthy work culture, the same thing applies to bonuses.

Here are the most significant things to consider when creating or expanding an employee bonus program at your organization—what to include and what to avoid at all costs. 


Best Practices

  • Let your company culture (or goal culture) inform the types of bonuses you offer, how they are awarded, and the values associated with each
  • Create your spot bonus program around organizational goals, culture, and success metrics. Additionally, link rewards to organizational success whenever possible.
  • Make the criteria for receiving or winning a spot bonus clear, in your employee bonus policies, in communication from leadership, and in actual practice.
  • Ensure that you're rewarding exceptional behavior that goes above and beyond, and not work that is expected.
  • Audit your employee bonus program on a regular basis to ensure that rewards are being issued fairly and in a timely fashion.


Mistakes to Avoid

  • Don't rely too heavily on employee bonuses. They aren't meant to take the place of your company's mission, vision, values, or meaningful work. They won’t fix a toxic work culture or solve larger challenges with employee engagement.
  • Don't give out bonuses haphazardly. This can cause confusion as to what behavior is rewarded, lead to unintentional favoritism, and ultimately loss of trust amongst team members and in leadership.
  • Don't give awards for best attendance or the lack of sick days taken.
  • Don’t automatically offer a bonus to every employee who says they are leaving. Harvard Business Review warns this rarely addressing the root problem and may negatively impact morale.
  • Don’t miss opportunities to offer a value add, in additional to financial rewards, such as extra PTO (like a floating holiday or longer leaves) or tangible gifts.
 
 

How to create an employee bonus program for your organization

Before creating a bonus program for your organization, it's important to gather the most important information.

Here’s a list of data points you’ll need to collect and questions to answer to help inform the structure, shape, and size of your employee bonus program. 

Organizational goals. You'll need these clearly defined to align your bonus program to ensure it has a positive impact on your organization.

Data analytics. Goals and metrics for which your department or team are responsible.

Budget approval. Clearly, monetary rewards require an available budget. Work with your company’s leadership to earmark funds for the employee bonus program. Remember to account for the associated taxes.

Stakeholders: Identify the people at your company you will need to consult, inform, or get buy-in from in order to make this idea come to life.

ROI: Identify the behavior or results you'd like to see your team members achieve. As much as possible, tie these behaviors back to organizational values and goals, to help illustrate the value of an employee bonus program to your stakeholders.

Responsibility: HR leaders are often at the helm of employee bonus programs in terms of design and management, but managers and team leaders play important roles in terms of executing the program. Ensure that everyone involved receives proper training and coaching in how the program is intended to function, how to request or nominate employees for rewards, and how to acknowledge employees. (For instance, some employees relish the opportunity to be acknowledged in front of their team, while others might find the same experience overwhelming and uncomfortable.) 

Accountability: You may not need a detailed, documented plan for holding reward-givers accountable, but it’s worth spending a little time contemplating how you might handle challenges and conflicts. For instance, how would you address employee complaints that a manager is awarding bonuses unfairly? How would you deal with a manager who seems to ‘forget’ there is an employee bonus program, or is using it too frequently? 

The list above covers the basic elements you'll need to begin drafting a bonus program. If you want help, connect with a Compt team member to talk through what a bonus program might look like at your organization.

 
 
 

See how a bonus program could elevate your company

We're here to talk through your company's current goals and challenges with keeping your employees engaged, and see if bonuses can help your company achieve greater success.

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