What is a performance bonus & how to implement it at your company
The broad array of performance bonuses — both monetary and non-monetary — implemented by companies today enable employers to be innovative and strategic with how they reward and motivate employees. And in a tight labor market, performance bonuses are only becoming more common.*
If you’re surprised to hear that there are many performance bonus models besides the annual bonus and the holiday bonus, it may be time to learn more about what a performance bonus is and how you can implement one.
In this post, we’ll discuss:
- What performance bonuses are and how they work
- The difference between monetary and non-monetary bonuses
- A step-by-step guide to implementing an effective performance bonus plan
*SHRM (Society for Human Resource Management), 2022
What is a performance bonus?
A performance bonus is a form of supplemental compensation that companies use to reward employees when they meet performance goals or agreed-upon objectives. It’s typically awarded around the time of a performance review, although an organization may choose to distribute them whenever they want to incentivize employees.
Performance bonuses can come in monetary and non-monetary forms. Some of the most common performance bonuses include:
- Spot bonuses: usually awarded upon completion of a specific task or meeting a goal, and they’re often unexpected
- Profit-sharing bonuses: employees receive a percentage of company profits for a given period
- Annual performance bonuses: reward employees for their contributions and development over a year
- Task bonuses or mission bonuses: usually given after completion of a large project or after hitting a major milestone, such as the completion of a certain number of projects or serving a certain number of clients
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Monetary vs. non-monetary performance bonuses
Both monetary and non-monetary performance bonuses exist to celebrate employee successes at work and show appreciation for your employees. But deciding whether to reward employees with monetary vs. non-monetary performance bonuses depends on your desired results.
For example, if your goal is to get employees to meet sales targets or increase annual revenue by a certain percentage, a monetary performance bonus is a great way to show that when employees achieve revenue-generating benefits for the company, they’ll be financially rewarded.
Non-monetary bonuses tend to be more effective when rewarding employees for less financially tangible contributions — like how they embody company values or have made strides to advance within their development frameworks. These bonuses also tend to be more cost-effective.
Types of non-monetary bonuses include:
- Employee recognition and praise in a company-wide setting
- Development opportunities like leadership training or courses to help an employee upskill
- Extra days off
- Fringe benefits like lunches, tickets to local events, or access to health and fitness programs
- Time off for volunteering with their favorite local charities or projects
- Free experiences like trips or unique activities in your area
How to implement a performance bonus plan
If you want your performance bonuses to effectively motivate, reward, and even engage your people, here’s our quick guide to setting up a performance bonus plan for your organization.
💡 Not sure how to assess employee performance to implement so you can create the right bonus plan? Leapsome’s performance reviews and skills frameworks can give you the actionable data and insights you need while creating and implementing performance bonus plans and setting up monetary rewards for your organization.
1. Choose your criteria & objectives
The first thing to decide is whether your performance plan will be geared towards an individual employee, a team, or employees across the company. Once you’ve decided who the plan is for, you can set the objectives for the performance bonuses (i.e., what results you want) and the criteria (i.e., what individuals or teams have to do to earn the bonuses).
Suppose your goal is to motivate your team leaders to increase team engagement by a certain percentage (and a great way to measure this is with the employee Net Promoter Score). In that case, you might award the next performance bonus based on whether employees report feeling more supported and their efforts valued by their team leaders in engagement surveys.
But if you want to motivate more cross-functional hiring at the company level in the next three months, you could implement a referral bonus program for that quarter.
2. Invite employees to participate in setting objectives
At this point, you still have the opportunity to refine your objectives; ideally, you’ll invite your staff into this process. Why? Because employees likely have more insight into how achievable your objectives are at a given point. In addition, setting objectives with them — rather than simply delegating these objectives to them — helps guarantee that individual goals are compatible with company goals.
“While it is important to provide incentives for employees to achieve individual goals, if these goals are not aligned with the company’s goals, employees may focus on achieving their own objectives at the expense of the company’s objectives.
For example, if someone’s bonus is based on increasing sales, but the company’s goal is to improve customer satisfaction, the employee may focus on increasing sales at the expense of providing good customer service. By first aligning performance bonuses with company goals, businesses can ensure that their system is well-rounded and highly effective.”
— Marc J. Shuman, founder of Shuman Legal
3. Research performance bonuses based on your employee needs and your industry
Performance bonuses work best when the type of bonus matches your goals — and that means thinking outside of the annual holiday bonus box and researching what performance-based bonus works best for your industry.
On the individual level, for instance, you might award your company leadership an annual performance bonus if your employee meets targets in time for their leadership performance review. Or, at the company level, maybe your goal is to increase your revenue; in this case, profit-sharing bonuses let your employees enjoy the monetary benefits of their laser-focused efforts.
For tech teams and companies that use the SCRUM project management framework and work on tight deadlines, a mission bonus — typically awarded after completing a large milestone project — might be a great way to honor your teams’ hard work.
4. Select the performance bonus type that best suits your needs
We’ve mentioned different kinds of performance bonuses, but let’s go over them in more detail so you can find the type that works best for you.
- Spot bonuses: awarded “on the spot” when employees achieve a specific result or complete a task.
- Task or mission bonuses: similar to spot bonuses, but they’re usually larger, lump-sum bonuses to reward employees who reached a milestone.
- Profit-sharing bonuses: can be given out regularly or on particular occasions to motivate employees to help meet revenue goals.
- Annual performance bonuses: often distributed around the same time as the performance review. While some companies worry that they shouldn’t tie compensation to performance reviews, this assures employees that bonuses and raises aren’t arbitrary.
- Holiday bonuses: Companies often yearly bonuses to show appreciation for their people or celebrate successes.
- Sign-on bonuses: used to attract new talent and offered to new hires during the onboarding process.
- Referral bonuses: rather than relying solely on recruiters, companies use referral bonuses to incentivize their employees to help staff open positions.
5. Follow up on results and ROI
Once you’ve delivered your employee bonuses, you need to track the results of your performance bonus plan on employee productivity and engagement.
Leapsome comes in to help you throughout this process as an all-in-one people enablement solution that lets you track employee performance, measure employee engagement, and manage compensation — all on the same platform. Our engagement, compensation, and performance tools communicate with each other, so you can use performance review and employee engagement insights to inform your performance bonus planning for the future.
Motivate & reward your employees with Leapsome
Performance bonuses aren’t just about issuing incentives. You should be strategic and creative with your bonuses to motivate and reward your people — and you need a system in place to help you track the success of your performance bonus plan.
The Leapsome platform can measure the impact of your bonuses on employee engagement and help you figure out what drives employee performance and what doesn’t.
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Take advantage of Leapsome for comprehensive compensation management planning and scaling — including setting up performance-based bonuses.
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