Performance Bonus: What, How, Why, Plus Examples

What Is A Performance Bonus?

A performance bonus is a financial reward (additional compensation) given to employees when they reach certain targets, based on your company's performance. It involves achieving specific criteria like cost control, customer satisfaction, or improved operational success.

Performance bonuses are a variable, unguaranteed pay type. It's a way to reward employees for going above and beyond certain targets.

Performance bonuses can range from project-based to discretionary bonuses - which we'll touch on next.

But first, what's the purpose of performance bonuses?

The main purpose of a performance bonus is to motivate employees to perform at their best. It's a way for companies to align business goals with the broader team. Performance bonuses are powerful incentive programs that reward and retain top performers while aiding your company's profitability!

Types of performance bonuses

Each business has its own set of individual performance bonus goals it wants to achieve.

Some want to reduce wastage during manufacturing, while others may want to increase sales to a record high. Implementing performance bonuses to motivate employees to reach these operational goals is one step toward your company's overall success!

Let's briefly look at the types of bonus programs commonly used:

• Individual (or discretionary) bonuses are a type of bonus paid 'on the spot' or at the discretion of managers or business owners.
• Commission bonuses can either be individual or team-based payouts. Employees receive a portion of their sales value when meeting sales targets.
• Team-based bonuses, like project-based bonuses (or 'mission bonuses'), are designed to motivate the broader team to achieve profitability on a specific project or task.
• Profit sharing bonuses and gain sharing bonuses are another form of compensation awarded to employees in recognition of exceptional performance. These are based on predetermined goals, measured against industry benchmarks and company profitability.
• If you want to implement profit sharing bonus plans, check out ShareWillow's free profit sharing plan template.

Why You Should Use Performance Based Bonuses

• According to a 2022 Lever study, 46% of employees say their salary or a potential bonus program is the biggest motivator for staying at their current company.
• Furthermore, in 2020, Harvard University stated that every $1 per hour pay increase resulted in a 2.8% employee retention rate as opposed to a 28% turnover rate for every $1 per hour loss.

As you can see, performance bonuses form the backbone of employee job satisfaction. Employees want to be rewarded for their efforts; whether it be a discretionary bonus or a more long-term gain sharing bonus plan. This impact drives:

Employee motivation and improves employee performance

A performance based bonus acts as a powerful incentive program for employees. When an employee is directly rewarded for their hard work and contributions, they are more committed to excelling and exceeding performance based benchmarks.

• 82% of larger organizations, as opposed to 66% in smaller companies, use variable pay such as performance bonuses to motivate employees - according to a 2019 Payscale study.

Boosts employee retention and can attract new talent

Competitive performance based bonuses can make your company more appealing to top-tier talent. These performance bonuses play a pivotal role in employee retention - meaning a lower employee turnover rate - which fosters job satisfaction, loyalty, and long-term commitment.

• According to the same Payscale study, 66% of US organizations say retaining employees is a major concern for them. 61% of these organizations planned to implement a merit-based bonus structure to combat employee loss.

How To Offer Your Employees A Bonus Based On Performance

Performance benchmark metrics and target setting can be tricky. Business owners need to define criteria and train managers to meet deadlines and objectives. Automated software, like ShareWillow's easy-to-use platform, can effectively reduce metric-tracking headaches and streamline specific goals.

Choose a performance bonus type

• Companies need to consider factors like business size, industry, and strategic goals that resonate with (and motivate) employees and promote company culture.
• Offer individual, team-based, or company-wide performance bonuses, or a discretionary bonus to employees.
• Evaluate the pros and cons of each type of bonus to ensure it's best suited to your business. For instance, a discretionary bonus might be more suited to smaller companies whereas profit sharing programs are better for large-scale organizations.

Decide what you’re rewarding and set fair and transparent criteria

• Transparent communication among all stakeholders and employees is vital to performance bonus success.
• Use clear, understandable language to avoid misinterpretations or misunderstandings.
• Involve and train managers on how to monitor and track benchmark progress. Quality work and extra effort (over a specific period) must be recorded when comparing performance metrics that result in monetary benefits.
• Avoid biased decision-making to ensure fairness and equality. Reward employees based on merit and work ethic, not by personal appearance, social status, or base salary.

Calculating the bonus amounts

• Determine the bonus amounts based on factors like fixed amounts or percentage of profits.
• Use reliable calculation formulas to monitor progress improvements.
• Regularly review company finances to ensure performance bonuses are budgeted for. Adjust and alter benchmarks accordingly to reflect the health of your company books. This will ensure you strike the right balance between generous payouts and financial responsibility.

Creating a timeline for performance evaluation

• Set well-defined timelines for evaluating performance and rewarding bonuses, such as annual, bi-annual, or monthly reviews.
• Select regular intervals that suit your business needs to ensure a meaningful assessment of performance.

Bring in software to help manage your performance bonus

• Leverage smart software tools, like ShareWillow's profit sharing template, to seamlessly track, monitor, and manage your performance bonuses.
• Automated systems are key to reducing bonus-related headaches and are effective tools to ensure accuracy and transparency.

Communicate the plan to your employees

• Effectively communicate all bonus-related plans to your team.
• Clearly explain how the plan works, what you expect from your employees, and how payouts are monitored and paid out. The communication should be consistent and open to feedback.
• Regular board meetings, webinars, and brochures are effective ways to achieve this.

Monitoring and adjusting the plan

• Periodically review performance bonus programs.
• Collect feedback from employees and managers to assess the plan's effectiveness.
• Adjust and tweak performance benchmarks to consistently align with business goals, ensuring the team targets remain relevant to the evolving needs of your company.

Performance Bonus Examples

Here are a few performance bonus examples:

• Managers often use individual performance bonuses, such as a discretionary bonus or spot bonus to reward employees in recognition of consistent high performance.
• "Employee of The Month" is an example of this, or a marketing agency awarding a spot bonus for a team that executed a highly successful campaign.

• A commission bonus (e.g. 5% of sales) is paid when sales targets are reached. This performance bonus may be awarded to a single employee - who contributed to the majority of sales - or the sales team as a whole for achieving pre-established goals (e.g. quarterly goals).
• Mission bonuses are another type of team-based bonus program. This is when teams achieve their performance metrics on a particular task or project.
• For example, an events company needs to sell 1,200 tickets to break even on their upcoming New Year's bash. The team boosts sales to over 2,500 tickets. This exceptional performance on the team's behalf may correlate to mission bonus payouts.

As mentioned, gain sharing and profit sharing bonuses are another common performance based program.

• Gain sharing is often used in the manufacturing industry whereby a company sets performance benchmarks, like waste reduction, and the profit "gain" difference is split amongst the team.
• For instance, a sofa manufacturing company currently 'wastes' $20,000 per month on materials, with $20,000 being the predetermined benchmark. After three months, employees reduce this wastage to $12,000 per month. This $8,000 'gain saving' is then divided among employees who contributed to the success of these performance expectations.
• In profit sharing, an employee receives monetary gains as a portion of the company's profits.
• There are many benefits of profit sharing; for example, a startup can allocate a fixed percentage of annual profits to be shared among employees - usually distributed annually.

Make Rewarding Your People Easier With ShareWillow - The Profit Sharing Software Platform You’ve Always Wanted

For employers looking for a more automated and efficient profit sharing management solution, allow ShareWillow to streamline the process for you.

Calculating a profit sharing bonus can be a pain - even for the most skilled in-house teams. ShareWillow simplifies the complex, traditional methods from yesteryear, bringing you a software platform that you've always wanted!