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When Money Talks: How to Start an Employee Bonus Program

September 4, 2020


Paying bonuses made easy

Discover more about the best compensation management software on the market.

How do you say “thank you” to your employees?

Does it look like a year-end holiday party? Or maybe a gift card to get coffee after a long week? Or maybe even an extra $1,000 after they hit their quarterly goals?

All of the above options are considered an employee bonus, which consists of a type of compensation that an employer will give to an employee in addition to their base pay or salary as part of their benefits administration plan. Whether they’re in the form of cash or something else, they can go a long way in showing you appreciate and care about your team. Creating an employee bonus program takes a lot of work, and you may be wondering why you would consider implementing one in the first place.

Starting an employee bonus program as well as offering compensation and benefits to your team can:

  • Get employees focused on similar business goals
  • Reward and retain your top performers
  • Promote the desired employee behaviors
  • Increase commitment to department and business goals

Whether you’ve noticed less productivity, a decrease in employee morale, or employees that are failing to reach their goals, it may be time to give them an additional incentive in the form of an employee bonus.

Types of employee bonuses

There are many types of employee bonuses that your business can give to employees that go above and beyond.

These bonuses fall into two main categories: discretionary and nondiscretionary.

  • Discretionary bonuses are bonuses that your employees don’t expect. They’re given randomly and at you, the employer’s discretion. They’re not required and the amount is up to you.
  • Nondiscretionary bonuses are promised to the employees, as they’re known and expected upfront. Usually, you’ll find these bonuses specified in an offer letter or contract.

Which category a bonus falls into depends on how you intend to reward your employees and the type of bonus you choose to give out.

Performance-based bonus

This type of bonus focuses on performance and is given to encourage an employee, department, or entire company to achieve a specific goal. A performance bonus is usually awarded for achievement over a certain length of time, like semi-annually.


of employees in America prefer bonuses based on personal performance.

Source: PayScale

Annual bonus

One of the most common types of bonuses is the annual bonus. It’s given annually based on an employee’s annual base salary. At most organizations, each employee is given a target bonus that reflects a possible bonus they could be given at the end of the year.

If the organization or manager decides that a certain employee has achieved all of their individual goals, then the annual bonus will be awarded. The amount or percentage of this bonus usually varies depending on the department or role and will be determined by leadership or HR departments.

Signing bonus

A signing bonus, sometimes referred to as a sign-on bonus, is a one-time payment to an applicant who is viewed as highly desirable by a company’s recruiter. It’s essentially the cherry on top of a job offer or incentive to join an organization.

Instances where a signing bonus may be given include:

  • An employee has competing offers from other companies.
  • An employee is being poached from another top company and needs to cash out the stock options they’re leaving behind.
  • An employee is negotiating a salary of $150,000, but the recruiter can only offer $140,000. They may be offered a signing bonus of $10,000 to close the gap.

It’s important to keep in mind that, usually, a signing bonus comes with a requirement that an employee stays with the company for at least six months or a year.

Retention bonus

When an employee has stayed within the company for a long period of time, they may be given a retention bonus. This type of bonus is typically used as a way to retain high-performing employees, especially when there is a hot job market as a way to keep employees from jumping ship or being poached. They’re typically a one-time payment that is preferred by companies over a salary increase or a long-term raise.


of employees believe retention would be higher with greater investments in recognition. 

Source: CareerBuilder

Referral bonus

A referral bonus is when an award is given to an employee who helps recruit new talent to the organization by referring someone to fill a vacancy. These bonuses are usually paid after the person is hired and they perform a successful job -- typically staying with the company for up to six months.

The actual amount of this bonus depends on the type of role that was filled, how difficult the role was to fill, and if the individual was a diverse candidate.

Companies can make this easy by utilizing employee referral software to help HR personal, hiring managers, and recruitment professionals oversee these programs. Tools within this category provide a platform in which employees can refer friends, leverage their networks, and participate in company-wide hiring campaigns.

Spot bonus

When an employee achieves a major goal or milestone or demonstrates exceptional performance, they may qualify for a spot bonus. These can sometimes be referred to as straight-up discretionary bonuses, they’re usually three or four-figure regards and usually center around performance and are spur-of-the-moment. Spot bonuses can also come in the form of gift cards or additional paid time off.

Sales commission

A sales commission is most commonly used among sales teams and is based on the amount of money or revenue a salesperson earns during a specific amount of time. A sales commission will complement the base salary of the employee and is defined at the top of the year through a sales commission structure.

Holiday bonus

A holiday bonus is usually given during the winter holiday time and is used by companies to end the year on a high note. Whether or not a holiday bonus is awarded to employees is usually based on how successful or profitable the company was over the last 12 months. They can be of any size and can often increase employee productivity, retention, and motivation to hit goals as the year comes to an end.

Profit-sharing bonus

A profit-sharing bonus is when an organization awards employee’s a percentage of their profits. How much this bonus will be is based on the company’s actual earnings over a specific period of time. Of course, this type of bonus is only given to employees when a company sees a profit. The amount can be given in either the form of stocks or cash and will depend on the employee’s salary and title.

Benefits of employee bonus programs

Now that you have a complete rundown of the types of employee bonuses your company can offer, you may be wondering why you should even consider inducing bonuses in the first place. Truthfully, there are a lot of benefits to rewarding your employees for all of their hard work – no matter the size of your company or the industry you work within.

One clear benefit of these programs is that it will motivate the team. When your employees have something to work towards, whether it’s an individual goal or a company-wide goal, having a bonus at the end of the finish line will help to incentivize them to finish it.

Your organization can also use this program as part of their recruitment marketing strategy to attract and acquire top talent. When a candidate is between you and another company, having these programs can be the deciding factor that makes them sign your offer letter over a different company.

If you notice your team is feeling a bit bogged down or overworked, implementing a bonus program can improve morale and give your team the added drive they need at work. And lastly, a built-out bonus program can bring your team closer together. Usually, when your department is rewarded with a bonus, it’s because they all worked as a team, made the effort, and crushed their goals. This can establish teamwork and also build strong relationships.

How to create an employee bonus program

When looking to create an employee bonus program, make sure it meets your company’s business strategy and compensation principles. Also, be sure to assess what the expectations are and what you’re trying to achieve by creating a bonus plan. It’s also in your best interest to take advantage of compensation management software to plan which employee bonuses you’ll award throughout the year.

Whether you’re looking to increase revenue or cross a specific milestone, follow these steps to creating an employee bonus program.

Understand what drives employees

To get started, you need to understand what drives your employees. To do this, really consider what type of reward will be the most effective towards producing the results you want for your company.

Is a year-end or holiday bonus enough to keep employees encouraged all year long? Would spot bonuses be more beneficial? Do they value time off more than actual cash? If you aren’t sure, utilize survey software and ask for direct feedback! They’ll appreciate you taking the time to find out what truly matters and what their preferences are regarding bonuses.

Be straightforward about eligibility

There’s nothing worse for your employee than to think they’re eligible for a bonus, only for them to realize too late that they’re not.

Because of this, it’s important for you to be clear who can be included in the program. Create goals that are challenging, but still achievable. Make sure to specify that employees who directly and indirectly impact the goals may be included in the program, and what that will look like.

You’ll also want to go into detail regarding eligible positions that can be included for the bonus, the length of time, and so one. For instance, you can say something like, “You must be a full-time content marketer who was hired before March 1, 2019.” Then, set a clear breakdown for how performance and achieving goals will be measured.

Effectively communicate requirement and expectations

When it comes to what your team can expect from the bonus program, communication is essential. Managers should expect to have regular meetings with their team to make sure that everyone is on the same page, especially when it comes to tracking and reviewing goals to be eligible for a bonus. Employees shouldn’t miss out on a bonus because they were unaware of their own progress or didn’t understand what was expected from their end. Clear objectives and communication are key on both sides.

Create clear documents regarding the program

One way to boost communication is to create comprehensive documents regarding bonus programs. This will also help to limit the number of questions, emails, and direct messages sent to the HR department after the announcement of a new bonus program.

This documentation should serve as a reference point for employees, managers, and other HR professionals at the organization, and should include everything employees need to both understand and attain their goals.

This document can answer questions like:

  • Who’s eligible?
  • When do employees become eligible?
  • How much is the bonus?
  • When do people receive the bonus?
  • Does the bonus evolve based on tenure?

Get creative with alternatives to cash bonuses

Looking to show your gratitude and reward your team, but with a strict budget? A bonus doesn’t always have to be in the form of cash.

If your organization doesn’t have the funds for cash bonuses, consider these alternatives:

  • A simple thank you or handwritten note
  • A charitable donation
  • Additional flexibility to their schedule
  • Extra time off
  • Onsite events or catered in meals
  • Achievement awards

How to pay an employee bonus

Paying a bonus can be complicated, and how you give out the bonus can make a difference.

If you’re paying a wage bonus or a raise, you can simply add the bonus pay to the employee’s wages. Just add the extra amount to the employee’s paycheck for the applicable pay period. You also have the option of giving a bonus check separate from regular wages.

It’s important to keep taxes in mind when calculating and paying bonuses. If the plan is to payout with regular wages, and the amount isn’t specified, you would withhold federal income tax on the total wages like normal.

However, if you give a separate check, or combine bonus pay with the paycheck with the amount specified, there are a few ways you might withhold federal income tax. If you withheld income tax from the employee’s regular wages in the current or preceding calendar year, withhold a flat 22%. For example, if you give an employee a $400 bonus, you will withhold $88 for supplemental tax.

If you choose to pay supplemental wages at the same time as regular wages, you’d add the bonus wage to the regularly paid wage, while then determining the income tax withholding on the combined wages. Then, subtract the tax already withheld, while then withholding the remaining tax from the bonus wage.

To put it simply, all bonuses are taxable and considered taxable income subject to employment and income taxes. It’s up to you, the employer, to correctly withhold, report, and remit the proper tax amounts depending on your state.

Remember that bonus payments are also subject to withholding from Social Security tax, state income tax, local income tax, and Medicare tax. If you need more information, visit the Employer’s Tax Guide by the IRS.

Show me the money

No matter how you’re showing appreciation to your employees, whether it’s with cash or a holiday party, it’s sure to go a long way in showing them their hard work and dedication to their role hasn’t gone unnoticed. Even the smallest act can make a big difference in the morale and sentiment of your employees.

While we’re talking about bonuses, how does the employee benefits package look at your company? Does it need a boost? If so, check out the 17 types of employee benefits you should be offering your staff.


Paying bonuses made easy

Discover more about the best compensation management software on the market.

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