Remote Work

How To Pay Bonuses To Employees

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 11 minute read

Workers are a company’s most valuable resource, and you recognize this as a business owner. Focusing on excellence rather than quantity is typical of most small businesses. The smartest and brightest employees are more likely to remain on the payroll if they are shown gratitude. Bonuses are a great way to incentivize hard work and show appreciation for workers’ efforts.

But you need a strategy before you hand out holiday incentives and gift cards. Bonuses for workers may seem like a frivolous benefit to you, but they may have significant meaning for them.

While 35% of small company owners, according to the U.S. Small Business Administration, give out holiday bonuses, the procedures, amounts, and types of bonuses vary widely. To make the right choice, one must gain an understanding of the when, how, and why of employee rewards in small businesses.

The Small-Business Owner’s Guide to Bonus Types

Recently, I met with our accountant to discuss the bonus plan for my company. To ensure we were competitive and that our employees were happy with the various bonus techniques we presented and implemented, I surveyed the workforce.

With the advice of my accountant, I have decided to keep my current incentive system of a holiday bonus at year’s end and “spot” bonuses every month. It works for us because we’re a tiny design studio, but your startup may need a different strategy. Learn about the various bonus structures before making a decision that might affect your business and your staff.

Bonuses for the Holidays

The Christmas bonus is the most well-known type of employee bonus. Everyone is familiar with the scene from “National Lampoon’s Christmas Vacation” in which the Griswold family is shocked to learn that the Christmas bonus they’ve been anticipating for months is actually a membership to a jelly-of-the-month club.

It’s dramatic for the sake of the film, but the underlying message is universal. If you fail to deliver on the holiday cash bonus promised to your employees, you risk lowering morale and productivity for the rest of the year.

In most cases, holiday bonuses have nothing to do with how well an organization has done or how much money was made. Several factors make the Christmas cash bonus my top pick.

Most of our staff are young parents, so the Christmas bonus is really appreciated. It’s a great way to set the tone for the upcoming year and boost morale all throughout the year. Each employee is so vital to the success of our little business, so in addition to the bonus, I like to give them a modest gift and a handwritten message. As a result, we’ve been able to keep the ideals of a small family business even as we’ve expanded.

Holiday Bonus Cash Best Practices

  • Don’t associate holiday bonuses with any one day. Bonuses for the holidays shouldn’t depend on a person’s faith. Labeling the benefit a “Christmas bonus” might be offensive to workers who don’t observe Christmas. Instead, call it a “holiday bonus” and distribute it on a day that has nothing to do with the holidays. Since people celebrate different holidays, I like to have bonus money distributed within the first two weeks of December.
  • Pick Your Preferences. You shouldn’t just choose a random number and call that your holiday bonus. Customize your Christmas bonus by setting a dollar sum per year of service or a percentage of base pay. Equal limits should be imposed on all employees.
  • Do not fail to set reasonable goals. Keep your staff in the loop about their Christmas bonus. Though it’s true that it’s supposed to seem like a little more cash, many workers rely on their bonuses to make ends meet or pay for Christmas presents and trips. Define the amount in advance and communicate the policy to all staff members. In spite of the fact that a holiday bonus is designed to be a pleasant benefit and expression of appreciation, it is helpful if employees are aware of what they may anticipate and can make appropriate preparations.

Employee End-of-Year Bonuses

End-of-the-year bonuses are common for incentives that are connected to the company’s overall financial success and performance over the course of the year. This form of incentive allows you to take stock of the last year and recognize staff for their contributions to your company’s success.

The amounts might change from year to year because they are often only distributed after a company has shown a profit. The bonus is reduced in a less prosperous year and increased in prosperous ones.

End-of-the-year incentives, whether large or small, provide workers a sense of control over their financial futures.

Best Practices for Employee Bonuses at Year’s End

  • Bonuses should be tied to the company’s overall performance. Employees are more likely to feel like they belong to the team when they get an end-of-year incentive. People working in a small firm should be aware of the impact they have on the company’s overall performance. Determine what level of corporate success will warrant the incentive, and then provide it.
  • Please settle up before the end of the year. The Internal Revenue Service states that small businesses can deduct incentive payments made to employees before or on December 31 as a business cost. For instance, if your year-end bonus for 2020 is disbursed by December 31, 2020, you’ll be able to deduct the amount on your tax return for that year. After that date, incentive payments will be considered a 2021 cost, so you won’t be able to deduct them until you submit your taxes the following year, in 2022.
  • Profit-sharing-style bonuses. By renaming year-end incentives as “profit sharing,” you may offer each employee a greater sense of control over their share of the company’s financial success. You should decide how much of the annual profit each employee will receive at the conclusion of the fiscal year, keeping in mind the cash flow needs of your organization. The bonus will be more than normal if you achieved higher than average profits. Providing employees with a portion of the company’s profits is a great way to encourage them to do their part in making the business successful. Employees have an incentive to remain with the company until (at least) the end of the year, which has a positive effect on retention.

Performance Bonuses

Bonuses may either be a gesture of gratitude or an incentive to work more. Employee motivation is boosted by performance bonuses. A performance bonus is awarded when a team member achieves their objectives and is directly proportional to their level of success. 

It’s a frequent form of incentive pay. Korn Ferry, an HR consulting firm, found that 49% of workers believe their yearly bonus depends on their own performance.

There is more leeway in the timing of performance incentives than there is in the timing of yearly bonuses, thus they are more attractive to small businesses. Small company employees frequently carry a bigger burden and play more functions than their counterparts at large corporations, and these may be utilized to help them persevere through a challenging year marked by COVID-19 fatigue and a constantly evolving working landscape. 

Gaining a bonus based on performance helps employees adjust to their new roles and responsibilities without having to negotiate a raise.

Best Practices for Performance Bonuses

  • Establish equity. Any worker’s chances of being eligible for performance-based bonuses should be equal. Avoid accusations of favoritism or unfairly rewarding staff by establishing a transparent incentive structure.
  • Pick Measurable Objectives >Incentives for good performance should be based on quantifiable targets. Quarterly sales targets, new client acquisition rates, customer satisfaction percentages, and project completion rates are all options. Whatever you select, be sure that your workers fully understand the criteria by which they will be evaluated for a performance bonus and how they may best work toward achieving those criteria.
  • Bonuses for both individuals and the whole team. Team incentives are offered by some small organizations, however this may lead to situations where one person does all the work while everyone else profits. Giving different incentives for achieving team vs individual goals is one approach to do this. Teams are recognized with in-kind items, such as a catered lunch for the entire department, and individuals are paid monetarily. The result is a more energized workforce, as employees who place a premium on individual achievement are nonetheless incentivized to contribute to the greater good.

Spot Bonuses

In the workplace, “on the spot” bonuses are any incentives given to employees for doing an exceptional job. Spot bonuses are one of the most frequent forms of nonsalaried employee remuneration, with a survey by PayScale finding that 31% of small firms in the United States employed them.

Spot bonuses aren’t meant to be as consistent as other forms of incentives, but rather to boost morale and demonstrate to employees that you appreciate their efforts whenever they’re rewarded. They are the most adaptable kind of bonuses since they are based on immediate success rather than long-term goals or set deadlines. Spot bonuses are a nice perk for employees, but they might backfire if they’re seen as an indication of bias.

Using spot bonuses is a great approach to encourage positive behavior and show appreciation for hard work, and I particularly prefer giving this authority to managers so they may reward their own staff. You can’t keep track of everything your staff are doing, even in a tiny company. Spot bonuses are a great way for managers to recognize and reward workers for going above and beyond in the workplace.

These tiny acts of recognition might include things like collaboration, a positive attitude, reaching a tight deadline, or assisting in the training of a new employee. Spot bonuses are great because they reward good conduct rather than time spent at work or achievement of specific goals, which means that they are applicable to both full-time and part-time workers.

Spot Bonus Best Practices

  • Create a plan for your financial situation. Spot bonuses, whether given by you or your superiors, have the potential to swiftly push you beyond your budgeted amount. Give managers a certain budget for spot bonuses throughout the year and allow them determine how to use the funds; this will help keep awards in control.
  • Make a system of progressive bonuses. It’s not fair to provide the same bonus for having a positive attitude as for taking on a challenging task or staying late to fulfill a critical deadline. You may incentivize good performance by offering bonuses, gift cards, or other rewards in three escalating stages for your spot bonus program.
  • Put the emphasis on them. Since the amount and conditions of profit-sharing, annual, and holiday incentives vary from employee to employee, there is no need to make them public. Spot bonuses are tiny monetary awards that are designed to highlight exceptional employees by drawing attention to their consistent performance. When an employee goes above and above to represent your company’s ideals, it’s appropriate to give them public recognition.

Bonuses for Hiring

You probably already know this if your small business is in a highly competitive sector: talented employees are extremely difficult to come by. To affect a candidate’s decision to work for your organization, consider including a hiring bonus in their compensation package. 

According to PayScale, just 14% of small firms give recruiting bonuses, giving major corporations an obvious edge in the recruitment process.

Incentives for new hires are a great way to attract and retain top talent, but it’s important not to go overboard if you want to stay competitive. A signing bonus may be a set dollar payment or a percentage of the annual salary for some companies.

Hiring Bonus Best Practices

  • Put the money you would have spent on hiring bonuses on a better offer. A signing or hiring bonus is not required of all employers. Instead, include it in your budget for hiring new employees and hold off on handing it out until a candidate specifically asks for it or mentions that another firm has offered more money. The signing bonus might then be used as bargaining leverage.
  • Just split the difference. A portion of the hiring bonus might be withheld as a “retention incentive” if the employee agrees to remain with the firm for a certain period of time. To improve employee retention, you may pay out the incentive in two installments: the first half on the employee’s start date, and the second half six or twelve months afterwards.
  • Don’t Let Anyone Know. The recipient of a recruiting bonus should be the only person who talks about it. The amount of a signing bonus that can be offered to a candidate may vary based on the level of competition, the candidate’s level of experience and education, and the company’s financial situation. It would be best if the final agreed price was kept secret so as not to damage morale among current employees.

Bonuses in cash and in kind

The most typical bonus kind is monetary in nature. It’s always well-received because it’s the simplest method to maintain order in your financial records when it comes time to create a budget, balance your accounts, and file your tax returns.

Employees’ bonus money is reported as additional wages on their W-2s, and withholdings can be calculated using either the employee’s normal rate or a flat rate of 25%. Bonuses exceeding $200 need an additional 0.9% Medicare withholding.

If I’m giving someone a monetary incentive, I always make sure to give them a little extra to account for taxes. If the incentive is $500 and the employee is subject to a flat 25% tax withholding rate, the actual amount of the bonus paid out will be $625. Consult your accountant if you need help deciding.

The best staff may be rewarded in a variety of ways, not only with cash. It can be difficult for a small firm to swallow a large quantity of money all at once, especially if funds are already tight. Rewards make a significant impact in inspiring and engaging staff; still, consider creative ways to distribute incentives, such as:

  • Stock options
  • My staff choose restaurant, Amazon, and shop gift cards.
  • An personalized gift basket
  • Increase of paid vacation days
  • Extra sick leave
  • The privilege of working from home
  • Employee incentive excursions and getaways
  • Lunches or social gatherings

Get some insight from your accountant on how to properly account for bonus payments in the annual budget. Consider your financial situation and make a decision based on it. Most of the time, investing in your staff will pay off in the form of dedicated workers who feel valued.

Bottom Line

When trying to build a stable workforce, small firms typically face significant challenges. Adding a bonus to the benefits package is a great way to keep employees happy and motivated. However, incentives do more than simply act as a negotiation chip; they also provide the groundwork for a healthy culture and a sense of employee worth.

Smaller companies make up for their lack of size with a collaborative work environment in which all employees feel like they have a stake in the company’s success. Take advantage of it by coming up with an incentive system that won’t break the bank but will nonetheless reward dedication, hard work, and loyalty.

Curated posts

Someone from Phoenix, AZ just viewed Best Colleges for Food