Definition of Bonus:
Bonus is a financial incentive given to current and prospective employees to reward their performance at work, for helping the organization, and for ensuring employee retention. This is in addition to the normal compensation given to the employees. For shareholders, it can be in the form of bonus issue, wherein they are offered free additional shares of the company’s stock. It is a way by which employers show their gratitude to the team or the employees for helping achieve the company goals. Consequently, it boosts morale and productivity, motivating employees to achieve their best.
Designing a Bonus and Rewards Scheme:
Bonuses can be paid based on the company’s discretion, or it can be contractual.
What is a discretionary bonus?
Often given as a gratitude to their good performance, employers may reward a bonus amount they see fit. In such cases, it is not necessary to pay a bonus to employees. It is only given when the employer deems it necessary. A common example would be festive bonus. This can also be in the form of non cash vouchers, luxury items, or prepaid cards as well.
What is a non discretionary bonus?
Non discretionary bonuses are expected by the employees as it is mentioned in the employment contract or documents. They can be dependent on certain factors, like performance benchmarks, attendance and so on. As a result, employees know what they have to do get the bonus.
Types of Bonus:
- Incentive Bonuses: include signing bonuses, referrals, and retention bonus.
Signing bonuses are usually monetary in nature given to talented candidates for making them accept the offer. This is to lure and retain them to your company, especially when your competitors are pursuing them too.
Referral bonuses are given to employees for referring candidates, who are ultimately hired by the company. This can be awarded to employees after the hired person performs well in their assessment period and is made a permanent employee. This is more of a thank-you to employees for referring good candidates.
Retention bonuses are given as a form of gratitude to employees for their service. It is a way to tell them that their service is appreciated.
- Performance Bonuses: This is offered as a reward for their impressive performance. It can be offered to a particular team, department, or individuals. It can be offered in cash, stock options, holidays, awards, gift cards etc. Sometimes it is offered to employees who achieve certain goals, sales targets or longevity milestones.
- Bonus shares: Shareholders would also receive bonuses in the form of dividends from the company profits. This can be cash dividends or bonus shares to shareholders.
- Bonus in lieu of pay: Many times, companies replace raises with bonus. This has been a cause of employee unhappiness at work as employers tend to reduce their fixed cost by withholding bonus during recession periods.