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5 Different Types of Employee Bonus Programs for Your Small Business

types of bonus programs

Does your small business give employees bonuses? Almost three-fourths of companies do, according to PayScale’s 2018 Compensation Best Practices Report [1]. Giving bonuses (also called “variable pay”) allows companies to reward top performers without increasing their fixed costs for salaries. Top-performing businesses are more likely to offer bonuses than the average business (79% vs. 70%), PayScale reports. According to a 2018 WorldAtWork survey, bonuses are becoming more popular, especially among small and midsized companies.

Employee Bonus Programs

Here’s a closer look at the most popular types of employee bonus plans and how to make them work for your business.

Annual Individual or Team Incentive Bonuses

Annual incentive bonuses [2] are given to individuals or teams that achieve goals set at the beginning of a performance cycle. More than two-thirds of companies in PayScale’s report use individual incentive bonuses and 23% use team incentive bonuses. Team incentive programs are best used when group effort is required to lead to a measurable result and individual efforts are difficult to quantify.

To Create a Motivating Annual Incentive Bonus Program:

Spot Bonuses

PayScale says 39% of companies use spot bonuses, which, as the name suggests, are given on the spot to reward desirable behavior. For example, you might give a spot bonus for going above and beyond, or for providing exceptional customer service.

At big companies, spot bonuses can be several thousand dollars. But for small businesses, you’ll want to keep them reasonable — $25 and up will work.



To Create a Motivating Spot Bonus Program:

Referral Bonuses

Referral bonuses are used by 39% of companies, PayScale says. They’re offered to employees who refer job candidates who get hired and complete a probationary period with your company. The theory is that birds of a feather flock together and, if someone is referred by a good employee, there’s a strong chance they’re likely to be a good worker themselves.

To Create a Motivating Referral Bonus Program:

Signing or Hiring Bonuses

Signing or hiring bonuses (given upon hiring) can attract and motivate new hires — 34% of companies in PayScale’s survey use them. Although they’re less likely to be used by small businesses, signing bonuses might be a good idea if:



For small businesses on a budget, a signing bonus can enable you to land desirable employees at lower starting salaries. Of course, signing bonuses can also backfire if candidates use them to job-hop.

To prevent this, it’s a good idea to stagger your signing bonus. You might pay half of the bonus at signing, then one-quarter after the employee has worked for six months and the rest at the end of the year. Some companies also institute “clawback” provisions where employees who quit a job before a year is up must return a percentage of the signing bonus.

However, don’t expect to rely on signing bonuses as your sole attraction and retention tactic. You need a comprehensive plan of employee development to keep these desirable workers motivated and loyal beyond the first year.

Profit-Sharing Plans

Profit-sharing is more popular among small and midsized businesses than their larger counterparts — 22% of small companies in PayScale’s 2018 Variable Pay Playbook [3] use it. These plans give employees a percentage of the company’s quarterly or annual profits. If you have a better-than-usual year, employees benefit. Profit-sharing plans can be tied into your company 401(k) plan, with the profits distributed as contributions to the retirement plan or can be on a cash basis.



To Create a Motivating Profit-Sharing Plan:

Profit-sharing plans, especially if tied to 401(k) plans, have specific regulatory requirements, such as keeping certain records, meeting reporting requirements and setting up a trust for the funds. Talk to your accountant or a third-party financial advisor to get assistance. Read the Department of Labor’s Guide to Profit Sharing Plans for Small Businesses [4] for more information.

Bonus Structure Tips

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