With the holidays and the end of the year approaching, many employers consider bonuses for their employees. Bonuses can be used to incentivize good performance or to show appreciation to hard-working employees. While bonuses are common among many companies, every business has a different philosophy for what bonuses should be used for and how they should be distributed. To provide some insight into your next bonus cycle, here is a quick, helpful guide with a few tips.
The Two Primary Types of Bonuses
The two main types of bonuses are discretionary and non-discretionary. A non-discretionary bonus may be outlined in an employee’s contract or in a company’s bonus plan document, setting an expectation that a bonus will be paid if certain conditions are met. A discretionary bonus is not guaranteed and instead is awarded by a company or manager if they decide it is merited. Whether the bonus is promised ahead of time or not, it can still be used in any number of ways to award employees.
It’s important to keep in mind that non-discretionary bonuses must be considered as part of regular wages for overtime calculation purposes under the Fair Labor Standards Act (FLSA) for non-exempt employees. This can be tricky from a compliance perspective for employers.
Times You Might Reward Your Employees with a Bonus
Bonuses are typically tied to an individual’s performance, the company’s performance, or loyalty or milestones. Some companies may also give out holiday or appreciation bonuses that are not performance-based.
Performance Bonuses: Performance-based bonuses are designed to encourage employees to do good work or to reach specific goals. Employers that want to encourage employees to reach a specific goal usually use non-discretionary bonuses. This encourages employees to work towards something throughout a specified time period in order to receive their bonus. Other employers may choose to reward performance after the fact and not tie it to a specific performance metric. This allows managers to reward workers that perform well in softer, less measurable areas.
Company Performance Bonuses: When a company has a successful year, they will often reward their employees by giving them an extra share in the profits. These bonuses can be the same for every employee or they can be tied to some performance metric that measures the employee’s contribution to the company’s success that year. Company performance bonuses are a great way to show employees that they play a role in the company’s overall success. They are also a great way to tie bonuses to an amount that a company can afford based on its yearly profits.
Loyalty/Milestone Bonuses: A loyalty bonus is given to an employee when they reach a certain milestone in their career. Often this is a certain number of years worked at a company, but it can also be tied to something like certification or a long-term sales target. Milestone bonuses help employees who are invested in the business feel that they are appreciated for their hard work and loyalty.
Holiday Bonuses: Some employers choose not to tie their bonuses to performance, but use them as yearly appreciation gifts for employees. Holiday bonuses can give employees something to look forward to every year and can help boost company morale.
Whatever type of bonus your company chooses, LBMC Employment Partners is here to help you distribute and track it. Contact us today!