A Guide to Understanding Bonus Structure

Companies can motivate their workers in numerous ways. For some, a high salary can motivate them to work harder. For others, they need to have some form of recognition or award to inspire them to be better. But there are also workers that find motivation when they receive bonuses.

But companies must know everything about bonuses before they use them as a motivational tool for their workers. It is best to know what are types of bonuses and how these bonuses affect the workers.

What is a Bonus Structure?

Most companies also refer to this as the worker’s incentive scheme. It includes rewards and other incentives outside of a worker’s basic pay. Most workers and companies regard these as an added perk in exchange for service and effort.

But companies give bonuses when a worker reaches a certain metric or achieves a pre-set goal. Bonus structures may differ from one company to another. An example can be the amount of commission the sales team receives depending on how big the company is.

Types of Bonus Structures

Like compensation, there are also many forms of bonus schemes. Knowing these will help companies know which ones are best for their workers. Here are several types of bonus structures.

1. Attendance Bonus

This is a bonus companies give their workers for their perfect attendance. Companies hand out this bonus depending on their compensation budget. They can give this every quarter or every year.

2. Signing Bonus

Companies also refer to this as hiring bonus or sign-on bonus. They give this to a new worker as a perk for joining the company. They can give this one time upon hire or in installments.

Some companies also have this bonus on a conditional basis. Often the worker needs to complete their probation period before they can receive it. They usually offer this bonus for job posts with hard-to-find skills.

3. Referral Bonus

Firms give this bonus to current workers that refer new hires. They can give this by the time the new hire completes their probation period.

4. Annual Bonus

Companies offer this bonus depending on their overall performance for the entire year. This will dictate the amount they can give their workers as a bonus.

5. Holiday Bonus

Holiday bonuses are not a new thing. Most companies offer this to their workers during the holiday season. It is usually equal to a worker’s one month salary. Companies commonly refer to this as the 13th month pay.

6. Performance Bonus

A company gives this when a worker achieves target metrics relating to their performance. They give this as a reward for reaching their key performance metrics. This is critical in driving motivation in the workforce.

7. Retention Bonus

Firms offer this type of bonus to prevent workers from leaving. It is a critical method of keeping key workers. These key employees make a significant contribution to the company. When they decide to leave, it will disrupt the company’s daily work routine. This can cause problems for the company overall.

8. Profit-sharing

This happens when companies allow workers to have a cut in their profits. They can give this bonus every quarter or every year. There are firms that tie this with 401(k) accounts.

It is undeniable that most companies and workers think highly of bonus schemes. But like any other scheme, there are good sides and bad sides to it. Here are the advantages and disadvantages of bonuses.

Advantages

1. Motivating factor.

Firms use bonuses to ensure workers perform their best all the time. Most of the time workers are more eager to work when they know they can receive bonuses for it.

2. It can reduce turnover.

In addition, bonuses can also help lessen workers leaving the company. This is a way for firms to keep workers happy and for them to stay longer.

3. Attract top candidates.

As part of a competitive compensation package, bonuses can help in attracting the best candidates. This works especially for positions that are in high demand.

4. Fosters clear targets.

Most often firms set targets that workers need to reach for them to get a bonus. This helps companies to have clearer focus on their overall targets as well.

Disadvantages

1. Added expense.

Including bonuses means that companies need to set aside a budget for it. This means added expense to make sure they offer competitive bonus structures.

2. Spark disappointments.

This can also spark disappointments among workers. This happens when they become too dependent on the bonuses they receive. The best example is the annual bonus. Since this depends on the company’s overall performance, there could be instances where bonuses are small.

3. Not always effective.

There are also workers that prefer other perks than receiving bonuses. There are workers that thrive more with a supportive workplace setting.

4. Can cause disharmony.

At some point, giving bonuses can increase competition amongst workers. There might be workers that seek more rewards than creating good relationships with everyone else.

5. Unfair practices.

Offering bonuses can also lead to unfair practices. This happens when managers do not do fair assessments and let favoritism set in.

Recommendations for Using Bonus Structure

1. Tie bonuses to the worker’s performance.

About 65% of workers prefer bonuses that are based on their individual performance. They know that when they perform well, they will receive an attractive bonus in return.

2. Consider using more spot bonuses.

Most workers also want to receive spot bonuses or one-time rewards. Companies give there as a reward for doing something special or valuable.

3. Use software to manage bonus structures.

Firms should also use tools and technology to properly manage their bonus structures. This will help track and assess their bonus structures more effectively. This will also ensure fairness and equal sharing of bonuses.

There are many ways to attract and keep workers in a company. Giving bonuses is one of those effective ways. This helps keep workers happy and can motivate them to work harder. As a result, companies will have better overall performance.