Bonus scheme

Bonus scheme is one of the most important reward schemes in the companies’ structure. The recent studies show that it is main tool to motivate the employees in achieving goals and enhancing their contribution to the company. Bonus scheme that is correctly developed improves employee's engagement and efficiency in daily work. Bonuses are designed to reward work effects of groups and individuals and it should be always based to the accurate and objective assessments .

Benefits of bonus schemes

Effectively design bonus scheme that is based on the realistic assumptions brings benefits to both employee and employer. Firstly, it improves position of the company on the market and increases its competitiveness, as pays always depend on companies’ performance. Furthermore, company which applies such scheme is able to optimize costs of performance and increases financial security variable salaries. The benefit is also on the employees’ side, as they have an opportunity to have an impact on the amount of the salaries. On the related note, such asset motivates and encourages employees .

Criteria that need to be met when company is implementing bonus scheme

When realizing bonus schemes employeer or manager should always remember about key factors that are important for implementing process:

• Employees are fully aware of exact goal and norms that need to be met in particular time,
• Bonus is in directly and clearly linked to the one's effort and accomplishments
• Reward should be always adjusted to the estimated targets
• Individuals and teams should have possibility to have impact on one's performance, development or improving competences
• People should have knowledge of possible incentives, so they can set their individual goals and plan their performance accordingly
• Company should have clear and fair plan on measuring performance, checking on the development of individual

Bonus schemes within a team

Bonus schemes may be applied for individuals but also for teams and there should be choice how particular recognition will be paid out. We can list three methods that can be used as examples of such pay out:

• All team members may receive equal award
• Employer set awards for individuals. In this case one's contribution to team performance is reviewed.
• Award is estimated by ratio of each employee base salary to the base salary of the team as whole

Mentioned above methods has both weaknesses and strengths. In case of first point, there is always a risk of free rider, when one will receive incentives, although there will be no contribution to award from one side. That may result in conflicts. However, equal bonus may improve cooperation within a team; encourage individuals to put more effort accomplishing team/company targets .

Examples of Bonus scheme

• Performance-based Bonus: This type of bonus is offered to employees who have achieved the pre-defined goals or objectives set by the organization. The bonus amount is directly proportional to the achievement of the goals.
• Spot Bonus: This kind of bonus is awarded to employees for exceptional performance or for going beyond the call of duty. It is often provided for one-time achievements and is arbitrary in nature.
• Referral Bonus: This type of bonus is given to the employees who refer talented candidates to the organization, who are eventually hired.
• Long-service Bonus: This bonus is provided to employees who have been with the organization for a long period of time. It is usually provided as a token of appreciation for the loyalty and service of the employee.
• Group/Team Bonus: This type of bonus is offered to groups or teams of employees who have achieved specific goals or objectives. The bonus amount is distributed among the team members based on their individual contributions.
• Profit Sharing Bonus: This kind of bonus is usually given to all the employees in the organization on the basis of profits earned by the company. The bonus amount is usually calculated as a percentage of the profits.

Limitations of Bonus scheme

A bonus scheme is a powerful tool to motivate employees and reward them for their work, however there are certain limitations that should be taken into consideration when implementing it. These include:

• Lack of clarity in the bonus criteria - If the criteria for awarding a bonus is not clearly outlined then it can lead to confusion and a lack of understanding of what is expected from employees. As such, it is important to ensure that the criteria is clear and unambiguous.
• Limited resources - A bonus scheme can be expensive and it might not be feasible for companies to award large bonuses due to limited resources.
• Unclear reward structure - If the reward structure for a bonus scheme is not clear, it can lead to employees feeling unfairly treated or not properly valued for their work. It is important that the reward structure is transparent and clearly communicated to employees.
• Lack of recognition for individual contributions - If a bonus scheme is focused on teams rather than individual contributions, it can lead to employees feeling that their individual efforts are not being recognised or rewarded.
• Complicated processes - If bonus schemes involve complex processes and paperwork, it can be difficult for employees to understand and follow them. This can lead to employees feeling overwhelmed and frustrated with the bonus system.

Other approaches related to Bonus scheme

One of the main approaches to develop effective Bonus scheme is to consider other elements related to it. These are:

• Performance-related bonuses - these bonuses should be based on the employees’ performance, tangible results and achievements. They are designed for individuals and teams and should be awarded for the efforts put in to reach the goals.
• Referral bonuses - these bonuses are usually given to employees for recommending other people to the company. This helps to increase the company's pool of qualified candidates and improve recruitment process.
• Skill-based bonuses - these bonuses should be based on employee's knowledge and skills, rather than their performance. This kind of bonus is awarded for employees’ development and learning.
• Loyalty bonuses - these bonuses are given to employees who remain in the company for a long period of time. This type of bonus is designed to reward loyalty and commitment to the company.

In conclusion, Bonus scheme should be developed in order to reward the work effects of individuals and teams, and to motivate the employees. It should be based on the accurate and objective assessments and other elements such as Performance-related bonuses, Referral bonuses, Skill-based bonuses, and Loyalty bonuses should be taken into consideration.

Footnotes

Bonus scheme — recommended articles

Promotion policy — Objective setting — Skills transfer — Forced distribution method — Appraisal method — Organizational commitment — Non financial motivation — Merit rating — Personnel strategy

References

• Andersson O., Holm H.J, Tyranand J.R., Wengström E. (2013),Risking Other People’s Money: Experimental Evidence on Bonus Schemes, Competition, and Altruism Research Institute of Industrial Economics, Stockholm, Sweden
• Armstrong M. (2002), Employee Reward, Chartered Instituteof Personnel and Development, London 
• Kumar H.L., Kumar G.(2010), Practical Guide to Payment of Bonus: Act & Rules: Second Edition, Universal Law Publishing CO. PVT. LTD.,New Delhi
• Thompson M. (1995),Team Working and Pay, The Institute for Employment, Brighton, UK

Author: Anna Stach