How to calculate employee bonuses
Types of employee bonuses
Explore how different types of bonuses can help you reward employees for a job well done and motivate teams to achieve your business goals. Presented by Chase for Business.
Small business owners need a great staff to manage and grow their business. One of the best ways to recruit and retain top performers is by giving bonuses. There are a lot of different bonuses out there. Here are six common types of bonuses.
The sign-on bonus
Use this type of bonus to recruit new talent. The amount of the bonus is usually based on the type of job. Typically, a flat rate is paid upon hire and signing a contract or a part of the bonus is paid to the new employee up front and the remainder after a certain amount of time with the company.
There are three ways to pay a signing bonus:
- All at once
- In segments spread over a series of paychecks
- With a set amount at signing and the remainder as part of the employee’s paycheck
The profit-sharing bonus
This involves distributing a percentage of profit over a set time period. The amount is often based on seniority, where those at the company the longest earn the most. A profit-sharing bonus is frequently given as a lump sum at certain intervals, such as quarterly, bi-annually or annually.
If the company has a profit of $5,000 and you award a bonus of 5%, then the employee will get $250. You might also set other requirements, such as being with the company for a certain amount of time.
The holiday bonus
Businesses may award a holiday bonus at the end of the year as either a flat rate or a percentage of each employee’s salary. Holiday bonuses are typically dependent upon the industry, employer preferences and company performance.
The team incentive bonus
Awarding bonuses to teams based on strong performance is a great incentive. Your goal is to foster environments that encourage teamwork, collaboration and cooperation. As a result, productivity typically improves. The team incentive bonus can be given as a percentage, similar to the profit-sharing bonus.
For example, if the team increases productivity by 20%, consider awarding a bonus that is equivalent to 10%. Higher values can be used for awarding performance over a short term, such as quarterly. This tactic may also be beneficial in times of high stress, such as holiday periods.
The milestone bonus
This type of bonus is beneficial when teams or individuals meet important deadlines. A milestone bonus also encourages improved performance and productivity. It is usually paid at a flat rate, such as $500 for meeting a particular deadline or sales goal. If the project is long-term, using milestone bonuses can be beneficial for keeping the work on track and keeping employees motivated. You will want to make sure you are also properly tracking performance and established goals.
The gift bonus
Businesses often award this type of bonus in the form of gift cards, stock options or travel vouchers. Gift bonuses are commonly based on achievements such as performance and seniority. Stock options are more likely to be given to employees that have achieved tenure, rather than to newer hires.
Gift cards and travel vouchers are flat-rate bonuses, but stock options may be a percentage. Gift cards and travel vouchers are great options to offer employees more choices regarding where and how the gift can be used.
Tools to encourage and thank your people
Bonuses are a powerful way to motivate and reward your employees for a job well done. Bonuses can encourage your employees to help meet your company-related goals — whether they be short-, medium- or long-term. Bonuses can also help build employee loyalty and reduce turnover rate, which in turn lowers staffing costs.
As you plan your approach to awarding bonuses, be sure to factor in the tax implications and any other legal obligations flowing from the bonus payment.
Meet with a local business banker to see how a business checking account can help you manage your team bonuses and company finances.