Types of Bonuses
There are several types of bonuses. Some plans simply give employees a certain share of the company profits, or perhaps a bonus to the entire company. Other programs give incentives to individuals or teams to perform at or above certain thresholds. And a variety of cash and noncash awards are possible for certain types of achievements in some companies. You can even earn bonuses for being hired or getting your friend a job at your company.
The following article details 10 types of bonuses that are typically seen in the workplace.
What is Profit Sharing?
One very basic type of bonus program is current profit sharing. A company sets aside a predetermined amount; a typical bonus percentage would be 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary. Such bonuses depend on company profits, either the entire company's profitability or from a given line of business. Sometimes the bonuses are given across the board, and sometimes they are given in larger percentages of compensation the more someone makes.
The purpose of profit sharing bonuses is to encourage employees to understand how their work affects the company's performance and to improve the company's profitability. Learn how your company makes money and how your position can help it make more. The annual report and other statements will give you an idea of how the company is performing. It will also make you look good to your manager if you show an interest in the company's performance.
This type of bonus program is most common in manufacturing plants and is designed to reward productivity and improved product quality. Gain sharing works best when employees become responsible for production quantity and quality and are encouraged to improve the way the product is made. This program reflects a philosophy that employees know their job best.
Gain sharing programs pay out bonuses for statistical improvements in production and quality on a quarterly or sometimes monthly basis, providing a sense of excitement for participants. These programs are often very successful, transforming the manufacturing plant into a center of employee commitment.
Spot Bonus Award
Some companies reward employees on the spot for achievements that deserve special recognition. Spot bonus awards are typically $50 and up and can be made by your immediate supervisor or any higher-level person in your company. You can get these for just being extra helpful. The math is in employees' favor: companies with spot bonus programs offer approximately 1 percent of payroll and expect to give out such bonuses to 25 percent of the employees eligible for them, allowing them to earn more than one instant bonus in a year.
Although the wrong kind of "employee of the month" concept can be cheesy, it's all in the execution. A well designed noncash bonus program can instill pride and improve employee morale. Employees who have done a great job should have to come to the front of a crowded room at a special ceremony as if they are receiving an Academy Award. The certificate or trophy should be thoughtfully and cleverly designed, and appropriate to the occasion. These awards are sometimes coupled with a token tangible award, such as a gift certificate, a bonus day off, or a great parking space.
You know your company has a good noncash bonus program if these awards are coveted, and if people who receive them display them proudly at their desks or in their homes. Moreover, this type of award may help you get a promotion or a new job, so include it on your resume.
No longer just for star athletes, sign-on bonuses have become commonplace. Their usage now extends to nearly all level of employees, especially when unemployment is low and top talent is hard to find.
Given to new employees who have just joined the company, this award serves two purposes:
- Establish goodwill
- Buy out any compensation "left on the table" from a previous employer.
The second purpose is important to remember. Before joining a new company, be sure to account for every kind of compensation program in which you participate. If you are expecting a bonus in a few months, ask your new employer to buy you out of it. If you have any stock options, particularly options that are in the money, ask the employer to buy them out (either in cash or new stock options).
Don't forget to include profit-sharing bonuses or defined contributions (for example, a 401(k) match or an Employee Stock Options Program (ESOP)) made to your retirement account. Remember, a sign-on bonus is to keep you whole as you trade one set of compensation programs for a new one.
Medium to large signing bonuses may be paid over a period up to a year to protect the company's interests.
Mission Bonus (also known as a Task or Milestone Bonus)
Task bonuses are given to a team of employees for achieving a milestone or for completing an important project. Usually, these bonuses are offered sparingly, but they have been used more frequently in software and hardware development to encourage meeting tight deadlines. Sometimes these programs incorporate a quality measure to guard against too much focus on speed.
Mission bonuses can be significant (one month's salary is not uncommon, and certainly no less than one week). This award is for the kind of achievement that deserves mention in your resume.
In hot job markets, it can be difficult for employers to find qualified personnel. When talent is scarce, many employers retain recruiters to find candidates, typically paying the recruiter 20 to 30% of the new hire's first-year pay. Many employers prefer to avoid this fee, and instead, offer referral bonuses to employees for recommending friends and acquaintances. Employers are comfortable in hiring friends of employees because employees are unlikely to recommend people who will make them look bad. So don't be afraid to invite your friend to work at your company!
Referral bonuses are typically hundreds to thousands of dollars and typically depend on the level of the new hire. Some firms pay as much as $10,000 to $20,000 if you introduce a new senior person to the firm. So if your former boss is a good fit for an opening, it's worthwhile to let your company know.
Retention bonuses are given to employees in unusual circumstances, such as a merger or acquisition, or when an important project needs to be completed. These bonuses are designed to provide continuity when there is potential uncertainty about an employee's continued employment at the company. The bonus encourages employees to stay until a specified date so that critical activities can continue without disruption. Retention bonuses are usually about 10 to 15% of salary.
Holiday bonuses range from small gifts; from cash to the ubiquitous holiday turkey to one month's salary. The amount is usually dictated by the company's practices. If you do receive one month's salary, count it as part of your salary if you look for work elsewhere. This practice is usually referred to as a "13-month salary," and is not a true bonus since no performance is required to receive it.
Sales commissions are awarded to salespeople for selling. Usually, these awards are paid out as a percentage of sales volume. In some cases, commission percentages can increase with higher sales volume. In fewer cases, the percentage can decrease. It all depends on the scheme. Sales commissions are a significant source of income for sales employees, comprising at least 50% of total cash compensation.
If you are accepting a new job or sales territory, ask for the previous salesperson's sales performance. This will help you determine how likely you are to achieve your quota and sales target. Also, don't forget to construct a business plan based on your understanding of your sales territory. This is key to understanding how easy or difficult hitting your goals will be.