Generally, a bonus can be defined as an extra and unexpected advantage. It can be an additional dividend, an issue paid to the shareholders of a company or an extra payment given to employees as a reward or to increase ones motivation and productivity.
BREAKING DOWN Bonus
Bonus pay is compensation over and above the amount of pay specified as a base salary or hourly rate of pay. The base amount of compensation is specified in a job offer, in the employee personnel file, or in a contract. Bonus pay can refer to achievement of a number of key indicators depending on the company, but it is often directly related to the business's income throughout the fiscal year. Usually, companies let their employees know ahead of time whether or not they will be rewarded bonuses.
Bonus as a Motivation
Bonuses given to employees to increase their motivation and productivity include sign-on bonuses, referral bonuses, and retention bonuses.
A sign-on bonus or signing bonus is a sum of money that a company offers to a prospective employee as a motivation to join the company. The name of bonus comes from the fact that an employment contract must be signed with the terms agreed between parties before the bonus money can be paid to a new employee. These bonuses are usually offered only to the middle and upper-level management positions as a way of making a compensation package more attractive to candidates. Signing bonuses are often used in professional sports, and to recruit graduates into their first jobs.
Referral bonus is a part of commonly used internal recruitment methodology intended to identify potential candidates from social networks of existing employees. Companies looking out for talented team members often devise an incentive system whereby current employees are rewarded with a referral bonus if they recommend a candidate who is ultimately hired. Recruiting candidates using employee referral is admitted to be the most cost-effective and efficient recruitment method to hire candidates.
A retention bonus is the most important motivation tool in a form of financial incentive applied by many companies to retain employees. The bonus is commonly given to key employees as a part of a general strategy to motivate the individual to remain in the company during stressful periods or within the organizational changes. A retention bonus is usually extended when it becomes clear that employee intends to quit the company, and it may result in an undesirable loss of business efficiency. Retention bonuses are becoming more common in the corporate world because companies are going through more transitions like mergers and acquisitions.
Companies with well-developed motivation system pay performance bonuses to employees who achieve satisfactory or high ratings during their annual performance appraisals. An incentive-based bonus links the amount of the payment to the level of performance. The built-in incentive for employees is to strive for high performance throughout the entire evaluation period, which means their performance must be consistently high for a 12-month period if the company conducts the annual performance evaluation. The effectiveness of this type of bonus is based on deep understanding of conscientious employees that their efforts and hard work will be rewarded at the end of the year. This type of bonus may be a one-time offer or periodical reward to employees and executives. Reward bonuses are not only cash rewards, as they might be paid out with stocks, gift cards, a day off work, holiday turkey, or simply by a verbal appreciation. Types of bonuses given to employees for a well-done job include the annual bonus scheme, spot bonus award, employee appreciation award, gain sharing bonus, and milestone bonus.
Some companies include annual bonus into employees’ contracts. In case if the company achieves a certain level of profitability through the fiscal year of operation, the profit is shared amongst the employees, with executives in the C-Suite getting a large share. The spot bonus award is a micro-bonus payment given to an employee or team in order to underline the special recognition. The employee appreciation bonus could also be recognized as a spot bonus or it could be a separate award given to an outstanding employee. Employees who work with a company for a stated period of time, for example, fifteen years may also be recognized by the company which would offer him or her additional compensation in cash or kind.
Other Bonus Schemes
Some types of bonuses are not even related to motivation or reward and are issued to all team members. It comes to, for example, about holiday bonus and ranges from small gifts as cash or the ubiquitous holiday turkey to one month's salary. The amount of bonus 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.
Stakeholders also receive several types of bonus being actually a return on their investment with the company. A vivid example of such bonus is dividends, which are paid to shareholders from funds created out of profits gained by the company. The board of directors has to approve dividend payments, and can also decide to stop the payments at its discretion depending on Company’s efficiency.
Besides that, shareholders can be paid bonus shares, which increase the total number of shares issued and owned. In this case, a bonus is typically based on the number of shares already owned by the shareholder, and is very close to a stock split, except that no splits occur with bonus shares and the figures in the Shareholders' Equity section of the balance sheet changes.
Bonus plans are not limited to office employees and shareholders. Other participants of company’s supply chain may receive additional compensation and rewards depending on existing bonus program.
2020-02-19 • Updated