An employee bonus scheme is an effective and popular tool HR teams and managers use to incentivise high-performance and boost employee retention. We cover them in depth in this article.
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What is an Employee Bonus?
An employee bonus is a supplemental monetary reward employers provide to recognise and incentivise outstanding performance, achievements, or contributions by individual employees or teams. These bonuses can take various forms, such as a one-time cash bonus, profit-sharing, or additional compensation tied to specific goals or metrics.
You can use one of the following mechanisms to decide on the size of a bonus:
- Flat rate payment outlined prior to the reward
- A percentage of annual salary
- A varying amount based on role, seniority or contribution to company goals (i.e. performance)
These can either be cash bonuses or be incorporated into standard payroll procedures.
What is an Employee Bonus Scheme?
An employee bonus scheme is a structured programme implemented by employers to define the criteria, process, and frequency of awarding bonuses to their workforce. It outlines how bonuses are earned through individual performance, team accomplishments, or company-wide success, creating a systematic and transparent approach to reward employees for their efforts.
What are Discretionary Bonus Schemes?
Discretionary bonus schemes are employer-granted rewards that lack predetermined criteria, providing flexibility in distribution. Unlike structured bonuses tied to specific metrics, discretionary bonuses are at the employer’s discretion and may be influenced by subjective factors like individual performance, company profits, or exceptional contributions.
This approach allows employers to acknowledge outstanding efforts, foster goodwill, and maintain flexibility in recognising achievements not covered by fixed criteria. However, the subjective nature of discretionary bonuses can lead to potential biases and may impact employee morale if the distribution process is perceived as unfair or inconsistent.
The Purpose of Bonus Payments
A well-designed bonus scheme can improve wellbeing whilst also getting companies closer to their overarching targets. Providing an employee with a bonus payment can bring multiple benefits, including:
- Motivation and performance: Bonus schemes incentivise employees to perform at their best, boosting motivation and productivity. In fact, 90% of HR workers believe that a solid recognition and reward programme can drive better business results.
- Talent Attraction and Retention: They help to attract top talent and retain skilled employees by providing financial rewards for exceptional contributions. However, Tracy Winton, senior vice president of human resources at Iovance Biotherapeutics, warns companies to use them sparingly: “It moves the employee/employer relationship away from the ideal partnership state and towards the transactional.”
- Goal Alignment: They also align individual and team goals with organisational objectives, fostering a sense of purpose and unity.
- Flexibility: Bonus structures can be tailored to specific roles, allowing organisations to adapt and address different performance metrics or business needs.
- Recognition: They act as a form of recognition, acknowledging and rewarding employees for their hard work and achievements.
Top 12 Types of Employee Bonus Schemes
Bonus schemes work in a slightly different way to a one-off bonus pay. They are a more formalised and structured way of distributing company wide bonuses, and are a popular way of rewarding strong annual performance in the UK.
Here are the most common 12 types of bonus schemes:
- Performance-Based Bonus
These reward employees for achieving specific targets or goals, i.e. contributing in a more substantial way to company performance or generating more profit. This type of scheme can push people to reach their full potential and motivate them to excel in their roles! - Profit-Sharing Bonus
These involve distributing a portion of the company’s profits among employees. This process gives employees a sense of ownership, encouraging a mindset of, “the company’s success is my success.” - Signing Bonus
This is offered to attract and secure talented individuals during the recruitment process by serving as an upfront incentive for new hires. Hiring teams use these to attract top-tier talent and, ultimately, stand out from competitors. - Referral Bonus
These are provided to employees who refer qualified candidates for job openings within the organisation. By having reliable employees participate actively in the recruitment process, companies are more likely to onboard like-minded people that they are more likely to be able to trust. - Retention Bonus
Designed to retain key employees, retention bonuses are offered to individuals who stay with the company for a specified period. These are popular among larger companies with over 20,000 employees, with a massive 81% of them offering them to employees. - Holiday Bonus
These are given to employees during festive seasons or year-end celebrations, the most common being a Christmas bonus. This gesture acknowledges their hard work and dedication throughout the year, whilst also retaining employees that might otherwise have left months earlier. - Spot Bonus
These are perhaps the least common of the twelve! They are given spontaneously to recognise exceptional performance or accomplishments. This ‘random’ recognition is said to motivate employees to excel in their roles consistently, rather than perhaps in the months leading up to a planned bonus period. - Attendance Bonus
This type rewards employees for maintaining good attendance records, encouraging punctuality and reducing absenteeism! - Sales Commission Bonus
These are common in sales-oriented roles, where employees receive a percentage of their sales revenue. This is the most common way that companies motivate their sales teams to convert more leads and bring in as much new business as they can. - Training and Development Bonus
This bonus scheme encourages employees to enhance their skills and knowledge through training programmes. Upskilling employees directly impacts an organisation’s success; essentially, highly trained teams means a more capable workforce! - Team-Based Bonus
This type rewards entire teams for achieving collective goals, fostering collaboration and teamwork, which consolidates the importance of collectivism in reaching company objectives. - Safety Bonus
Safety bonuses are more rare. They promote a secure work environment by rewarding employees for adhering to safety protocols and maintaining accident-free records. This proactive approach enhances workplace safety and employee well-being.
Is a Christmas Bonus Worth Offering?
A Christmas bonus can be a worthwhile gesture depending on the company’s culture, financial health, and employee expectations. A Christmas bonus can boost employee morale, enhance a positive workplace atmosphere, and demonstrate appreciation for their hard work throughout the year.
Amidst the UK cost-of-living crisis, employees’ demands for additional financial incentives are growing. Resource Solution’s Workplace Christmas Benefits report found that 53% of UK workers don’t mind having an office Christmas party, and 15% have no interest whatsoever. However, 42% of this group stated they’d prefer a bonus or gift.
Bonus Scheme FAQs
What are the best bonus schemes?
Some of the most popular employee bonus schemes include:
- Performance-Based Bonus
- Profit-Sharing Bonus
- Signing Bonus
- Referral Bonus
- Retention Bonus
- Holiday Bonus
- Spot Bonus
- Attendance Bonus
- Sales Commission Bonus
- Training and Development Bonus
- Team-Based Bonus
- Safety Bonus
How do I set up a bonus scheme?
First, to set up a bonus scheme, define clear objectives aligning with organisational goals. Choose a suitable bonus type based on the desired outcomes, whether performance-based, profit-sharing, or others. Establish measurable criteria for eligibility and payout amounts. Communicate the bonus scheme transparently to employees, ensuring they understand the goals and how bonuses are earned. Implement a fair and consistent process for evaluation and distribution. You can check in with your workforce regularly and review your scheme continuously to ensure it meets the needs of your people!
How do I give my employee a bonus?
Establish clear criteria tied to performance, profit, or other benchmarks to give an employee a bonus. Communicate these criteria transparently, ensuring employees understand how bonuses are earned. You can offer the bonus in cash, or incorporate it as a monthly or yearly sum within their usual paychecks.
What is a good bonus for an employee?
In the UK, most employees receive 1% – 5% of their yearly salary as a bonus. Senior executives can receive much higher bonuses, often based on performance. Ultimately, a good employee bonus should align with performance and be meaningful. It can range from a percentage of salary for hitting targets, profit-sharing, or one-time bonuses for exceptional efforts. The key is to make it fair, transparent, and motivational.
What is the difference between a bonus and an incentive?
While bonuses and incentives both aim to motivate employees, bonuses are typically additional payments tied to performance, profitability, or other achievements. Incentives, on the other hand, encompass a broader range of rewards or perks designed to encourage specific behaviours, such as recognition, gifts, or non-monetary benefits.
What is the difference between a discretionary and a non-discretionary bonus?
A discretionary bonus is given at the employer’s discretion, without a predetermined formula or criteria, often as a gesture of goodwill. In contrast, a non-discretionary bonus is based on predefined criteria, such as hitting sales targets or achieving specific goals. Non-discretionary bonuses are typically outlined in advance, providing transparency and clear expectations for employees.
What is the difference between non-cash incentives and employee bonus schemes?
Non-cash incentives encompass rewards beyond monetary bonuses, including recognition, flexible schedules, or professional development opportunities. These aim to motivate employees by enhancing their overall work experience. On the other hand, employee bonus schemes specifically involve financial rewards, often tied to individual or collective performance, profitability, or achievement of predetermined goals.
