Employees deserve meaningful recognition beyond their paychecks. From sign-on bonuses to year-end, spot bonuses, holiday bonuses, and more -- here's everything you need to know about employee bonus programs.
By Sarah Bedrick
Bonuses are an additional form of compensation beyond salary given to employees to recognize and reward them. Bonuses can come in the form of cash, gift cards, allocated stipends (like Lifestyle Spending Accounts), 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 comes to mind when you hear "employee bonus"? There are many different types of bonuses that can be given to employees.
A bonus given to employees for signing as an employee of your company.
A bonus given to employees who have referred a candidate who was hired by your organization.
A retention bonus is given to employees recognizing work anniversaries. These types of bonuses are often made up of year-end lump-sum payments used to reward an individual for length of service.
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.
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.
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.
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.
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 the 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:
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.
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.
Spot bonuses are excellent for "on-the-spot" incentives.
Example situations where a spot bonus would be fitting are typically tied to exceptional employee performance on the job, such as if they filled in for a struggling colleague, achieved 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!
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.
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.
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.
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 dos and don'ts for bonuses best practices is 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:
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.
Before creating a bonus program for your organization, it's important to gather the most important information.
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.