The Ultimate Guide to

Employee Bonus Programs

What are bonuses?

Bonuses are an additional form of compensation, beyond salary, given to employees to recognize and reward them. They can be given in the form of cash, gift cards, lifestyle spending accounts, or other gifts like movie tickets.

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

Also, it's important to note that while bonuses are an excellent method of recognizing and rewarding the efforts of team members, they do not take the place of effective leadership and intentional company culture. 

What are the different types of bonuses?

  • 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 whom 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.
  • 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.
  • Year-end or holiday bonus. Usually made up of year-end lump sum payments used to reward an individual for hard work and goals achieved.



Why Developing an Employee Bonus Plan is Good for Business

According to PayScale’s 2018 Compensation Best Practices Report (CBPR) report, nearly three-quarters of organizations give some of their variable pay. If you're not yet offering some sort of employee bonus, it might be worth adding to your people strategy. Below are some of the reasons so many companies are adopting bonuses:

  • They are another tool in the HR team's tool-belt. HR managers goals are to empower employees to be their happiest and most productive selves, and bonuses are a great tool to direct and celebrate excellent behavior and work.


  • They're another way to stand-out and a highly competitive labor market. "We have seen a noticeable increase in companies starting to feel the impact from job openings..." explains Paul Wellener of Deloitte. Companies taking an innovative approach to solving for their employees not only provide team members with the benefits of the new programs, but it an indicator to candidates that the employer cares.


  • They can be a powerful incentive which 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 tool-belt. Because you can create them 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. 


  • The 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. 

How to know which bonuses are right for your organization

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.
  • Lost stock. Candidates may be hesitant to leave a company because they have stock that hasn’t vested yet. Sign-ons can help with this."


Read on: Why might an employer pay a signing bonus?

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, employe your employees to help provide referrals they know to work at your organization.

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

Read on: Are employee referral bonuses worth it?

When you might want to use spot bonuses:

Spot bonuses are excellent for "on the spot" incentives. This can be for an employee living by the values

When you might want to use retention bonus: 

Often referred to as a bonus given to employees who either reach a specific milestone anniversary at your organization, or given to employees to keep them at your organization after an acquisition, merger, or organization restructuring.

Culture thought leaders (like HubSpot) are combining retention bonuses with more than just money, some companies are partnering them up with sabbaticals so that they can create highly attractive reasons for employees to stay at their company longer. 

Read on: Retention compensation plans -- Please stay! 

What other types of bonuses are out there?

As people operations professionals become more strategic partners of the business, the ability and desire to innovate on old or out-dated HR practices has grown tremendously.

A new type of bonus emerging, is a concept which is a mixture of bonuses and perks -- called perk stipends or lifestyle spending accounts. These stipends combine the two concepts to give employees money to put toward important life goals, needs, and anything that helps them live their best life. Examples of these include Qualtrics giving employees $1,500 a year to "try something new" and Microsoft giving employees $500/year as a "Stay Fit" perk

Read on: Everything you need to know about lifestyle spending accounts


See how a bonus program could work at your company

We've got you covered. 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.

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 for 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.
  • 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.





Requirements to creating a bonus program for your organization

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

Collect the following data points to guide your bonus program creation:

  • Organizational goals. You'll need these to align your bonus program to ensure it has a positive impact on your organization.
  • Goals and metrics for which your department or team are responsible.
  • Budget available to use toward a program like this, as well as constraints. Remember to account for the associated taxes.
  • Who at your company you'd need to consult you, inform, or get buy-in from in order to make this idea come to light. 
  • The behavior or results you'd like to see your team members achieve.


The items above are 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.

Read on: How to structure your bonus program

Want to learn about more of today's best people-strategies?

Get ahead of the market and learn about the new innovative perks strategy: lifestyle spending accounts.