5 Different Types of Employee Bonus Programs for Your Small Business

employee bonus

Employee bonus small business programs are increasingly becoming a significant element of compensation packages. Does your small business offer employees these bonuses?

It may be time to consider it, as almost three-fourths of companies currently do, according to PayScale’s 2018 Compensation Best Practices Report.

Implementing bonuses, also known as ‘variable pay,’ provides an innovative strategy for companies to reward their top performers without necessarily increasing their fixed costs, such as regular salaries.

This strategic approach has found more resonance with top-performing businesses, with 79% of them embracing it compared to 70% of the average businesses, as PayScale reports.

The trend of offering bonuses has been gaining momentum, with a 2018 WorldAtWork survey revealing its growing popularity, particularly among small and midsized companies.

Therefore, it may be an opportune time for your small business to explore introducing or expanding bonus programs to drive productivity and employee satisfaction.    employee bonus small business

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 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:

  • Set clear, consistent and measurable goals that are tied to the individual or team’s roles.
  • Employees should understand how their actions relate to the overall goals. Team incentives can cause problems when “moocher” employees who don’t work as hard as their teammates benefit from the group effort. To avoid this, make sure that achieving the goal you set requires the efforts of the entire team.

employee bonus

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:

  • Create different levels of spot bonuses. You might give out very small rewards, like a $25 gift card, for being the most energetic person in the company trade show booth, on up to $500 or more for a truly above-and-beyond action.
  • Set a budget. Giving out spot bonuses could quickly eat up capital if you don’t set a limit. Create an annual budget for spot bonuses and don’t feel like you have to use it all if you don’t see deserving employees.
  • Make it count. Give spot bonuses for truly exceptional behavior, not just for doing the job.
  • Make it a surprise. If spot bonuses become rote — employees know every week two employees get one — they lose their power to motivate. Keep employees guessing and give spot bonuses irregularly.
  • Publicize it. Part of the reward of a spot bonus is getting singled out in front of your teammates for your work, so make sure you award spot bonuses in front of the rest of the staff. You can also publicize it by sending out a company-wide email or making an announcement.

employee bonus small business

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:

  • Develop a policy. Do you want to offer referral bonuses for every job, or only for certain positions? Do you want to have an ongoing referral program, or just alert employees at specific times you’re looking to hire and ask for referrals then?
  • Determine how you’ll handle payouts. Some companies pay out part of the referral when the employee is hired and the rest after they complete a probationary period of three months or six months. Others give the entire bonus at the completion of the probationary period. Either way, make sure your policy is in writing.
  • Consider offering higher referral bonuses for:
    • Referring candidates who increase staff diversity.
    • Referring candidates who turn out to be high performers.
    • And referring candidates for hard-to-fill jobs or with unique skills.
    • Depending on the difficulty you’re having finding candidates, you could even offer a very small referral bonus (like $25) for referring people who are worth calling in to interview, but don’t get the job in the end.

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:

  • They are standard in your industry. For instance, signing bonuses are common with IT employees.
  • You need to attract a candidate with hard-to-find skills.
  • You need to motivate a desirable candidate to move from another state.

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.

employee bonus small business

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 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 tend to be very motivating because they give employees a sense of ownership in the business. Make sure employees understand how the profit-sharing plan works.
  • Set parameters for who can participate. Typically employees must have been with a business at least one year before taking part.

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 for more information.

employees bonus small business

Bonus Structure Tips

  • Know how much money you have available for the bonus plan. In the case of spot or discretionary bonuses, this might be a dollar figure (you set aside $5,000 a year). In the case of longer-term bonuses, such as incentives or profit-sharing, this could be a percentage of profits or earnings.
  • Base the plan on quantifiable, measurable results. Specify what the goals are, how progress toward goals will be measured, and how often.
  • Consider setting “tiered” goals so that employees can reach different bonus levels by achieving more difficult goals. For example, a worker might get $X amount for reaching the minimum goal, but $XX for reaching the maximum.
  • Put your bonus plan in writing.
  • Make sure employees understand what they have to do to get the bonus. Review the plan with the entire staff as well as with individuals (in the case of team or individual incentive bonuses).
  • For long-term bonuses, setting milestones along the way and reviewing progress toward the end goal quarterly can help keep employees focused. You might even want to give small bonuses at these checkpoints.

Evaluating the Impact of Your Bonus Programs

Analyzing the effectiveness of your bonus programs is crucial. Measure their impact on employee performance, morale, and retention. Survey your employees to understand their perception of the bonus programs and make adjustments based on their feedback.

Aligning Bonus Programs with Company Culture

Ensure your bonus programs align with your company’s culture and values. For instance, if teamwork is a core value, team-based bonuses might be more effective than individual bonuses. This alignment helps reinforce your company’s values and strengthens your organizational culture.

Legal Considerations in Bonus Program Implementation

Be aware of legal implications when implementing bonus programs. Ensure compliance with labor laws and tax regulations. Consulting with a legal expert can help avoid potential legal pitfalls associated with employee bonuses.

Customizing Bonus Programs for Different Employee Roles

Customize your bonus programs to fit different roles within your organization. For example, sales positions might benefit more from commission-based bonuses, while other roles may appreciate performance-based bonuses tied to specific project outcomes or company goals.

Integrating Technology in Managing Bonus Programs

Utilize software and technology to manage your bonus programs efficiently. Automated tracking systems can help in accurately calculating bonuses based on predefined criteria and ensure timely and error-free bonus distribution.

The table below provides a summary of the various types of employee bonus programs discussed in the article, highlighting their key characteristics, benefits, and recommended practices:

Bonus ProgramKey FeaturesHow to ImplementCompanies using
Annual Individual or Team Incentive BonusesGoals set at beginning of cycle; measurable outcomesSet clear, consistent, measurable goals; ensure team efforts are necessary67% individual; 23% team
Spot BonusesInstant reward for desirable behaviorCreate different bonus levels; set a budget; make it a surprise; publicize it39%
Referral BonusesGiven to employees who refer successful hiresDevelop a policy; decide on payout structure; consider offering higher bonuses for diversity or high performers39%
Signing/Hiring BonusesGiven upon hiring to attract and motivate new hiresConsider staggering payment; use "clawback" provisions; don’t solely rely on signing bonuses34%
Profit-Sharing PlansEmployees receive a share of the company’s profitsEnsure employees understand the plan; set parameters for participation; meet regulatory requirements22% of small companies

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Rieva Lesonsky Rieva Lesonsky is a Columnist for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Visit her blog, SmallBizDaily, to get the scoop on business trends and free TrendCast reports.