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C&B toolkit: Which bonus structure is best for your company?

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It’s almost end of the year, and your employees are going to be looking forward to (hopefully good) news on their bonuses in recognition of their hard work throughout the year.

To provide a reason to stop and ponder, Software Advice has surveyed more than 200 full-time employees on the kind of bonus structure they’d prefer. Albeit the survey was based in the US, we hope it gives some good ideas in your discussions going in to 2020.

1. Tie bonuses to individual performance

Almost two-thirds of workers prefer a bonus tied to their individual performance (65%) over department or company-wide bonuses or those not tied to performance at all.

From an employee perspective, bonuses based on individual performance can be incredibly lucrative—assuming workers can meet often-rigorous performance goals. It’s high-risk, high-reward.

Paying out a substantial year-end bonus to every employee in your business can certainly make headlines, but the bonus has to be tied in to performance in a way that makes them more productive.

2. Get rid of hit-or-miss bonus targets

Once you’re monitoring individual performance and doling out bonuses accordingly, you might be tempted to keep things “black or white” to make administration easier: If workers hit their target, they get their bonus. If they miss it, tough luck.

Beware though, this approach can backfire. Hit-or-miss bonuses can have negative effects:

  • High performers with nothing else to work towards will call it a day after hitting their mark.
  • Lower performers won’t even attempt to reach their goal if there’s a risk their efforts could all be for nothing (e.g., if a salesperson has an annual goal of 300 sales, why work harder and risk getting no reward for 299 sales?).
  • Employees don’t like it either: A majority (75%) of workers prefer to earn a percentage of their performance-based bonus for achieving a percentage of their goal (a tiered bonus) over earning only their full bonus if they hit their full goal.

Here’s the solution: Set multiple performance goals for each employee, and reward them a percentage of their bonus for achieving a percentage of their goal. This way, you can promote continuous effort among your employees without seeming unfair.

3. Ask employees what bonus payout timeline they prefer

Businesses don’t want to waste time considering how to schedule payouts for recurring bonuses. Generally, there are two options: Pay your employees 12 smaller monthly bonuses or one large annual bonus.

However, the answer from employees was uncertain: The results were almost evenly split between 12 monthly bonuses (53%) and one annual bonus (47%), assuming they total the same amount.

When deciding what timeline to follow at your organisation, the best action to take is to ask your employees what payout timeline they prefer through a random survey.

If results at your workplace are similarly split, you may have to consider other factors, such as type of industry or workplace. For example, it’s likely that all sales teams will need monthly bonuses rather than yearly ones because of the nature of the job.

4. Consider spot bonuses for special effort

Besides recurring bonuses, one-time bonuses given out for specific actions can also motivate employees. These may include:

  • Employee referral bonuses
  • Retention bonuses during mergers and acquisitions or tumultuous periods
  • Signing bonuses when accepting a job offer
  • Spot bonuses to acknowledge special effort

When employees were asked employees which of these one-time bonuses they’d prefer, if they could only be eligible for one, 64% say they’d prefer a spot bonus for special effort.

Typically, spot bonuses are often up to managers’ discretion and limited to small amounts ranging from $25 to $500, but they’re a great way to reward and acknowledge special effort by employees.

Image / Software Advice

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