Performance-Based Bonuses: Basics and Best Practices
Many companies give performance-based bonuses to individuals or teams based on specific achievements and milestones. These bonuses come in addition to the employee’s base salary or hourly wage as an incentive to encourage greater productivity or accomplishment.
Performance-based bonuses can encourage employees to reach new levels of performance to make the company more effective and profitable. This article will explain performance-based bonuses in greater detail while answering questions like when to offer performance-based bonuses and what types exist.
What are performance-based bonuses?
A performance-based bonus is any compensation over and above a team member’s regular salary. Standards for performance-based bonuses are usually established and communicated to employees in advance so they know what criteria they must meet to qualify.
Sometimes, the entire team learns when an employee receives a performance-based bonus to honor high individual performance and encourage other employees to follow their example.
One of the most commonly asked questions about performance-based bonuses among Human Resources (HR) teams is how to calculate the ideal bonus amount.
How you structure bonuses will depend on your corporate structure and solvency, but they should be tiered to reflect performance. Annual bonuses often range between .5% and 7.5% of an employee’s annual salary, but may be as high as 15%. The amount may depend on the employee’s overall experience and annual performance.
Performance-based bonus plans are offered in different forms and at various times. Some common examples of performance-based bonuses include:
- Cash bonus. Employees may receive a one-time financial reward for meeting (or exceeding) specific company performance metrics.
- Stock options. Occasionally, companies provide stock options for employees to increase their stake or ownership in the organization as they build its value through their performance.
- Profit-sharing. As employees bring more money into the company, the company may compensate the employee by allowing them to hold onto a greater amount of what they produce.
- Salary increases. Employees who exceed performance expectations or consistently outperform standards may receive a salary raise or better benefits as a reward for their contributions.
Performance-based bonuses are often monetary, but they can take many forms. In addition to offering cash bonuses, consider how nonfinancial performance-based bonuses work to motivate employees.
- Gift cards. Employees might receive gift cards for hotels, spas, or restaurants to honor their hard work. The benefit of these bonuses is that employees have to spend money on taking care of themselves rather than doing something more practical with a cash-based incentive.
- Wellness benefits. Performance-based bonuses in this category could include free or discounted gym memberships, specific work hours designated for recreation or physical activity, and the opportunity to have occasional days off for mental health.
- Professional development. Some companies offer additional professional development opportunities to allow their top talent to expand their knowledge and develop new skills.
- Time off. Employees may receive extra vacation or personal days as a reward for their achievements.
- Special assignments. In certain situations, a performance-based incentive plan may include the opportunity to take on new opportunities or tasks.
- Flexibility. Once employees earn their supervisors’ trust through their ongoing contributions, they may gain the discretionary freedom to work from home or choose their own hours.
When to use a performance-based bonus
Performance-based bonuses are common when employee motivation or drive directly correlates with the company’s profitability. Many sales-based positions include additional compensation based on individual contributions. The same is true for wealth management and customer service professionals.
Performance-based bonuses are similar to incentive-based bonuses, but the application of performance-based bonuses can be more wide-ranging. Incentive-based bonuses are usually tied to the achievement of a predetermined measurable outcome. Since performance-based bonuses connect more with individual and team production and execution, they might be more widely applicable.
If you’re considering performance-based bonus plans but unsure when to use them, consider these situations:
- Meeting (or exceeding) sales targets. One of the most common types of performance-based bonuses, many companies compensate employees who bring in more money for the company.
- Finishing projects before deadlines. Companies can validate employees for efficiency and productivity by rewarding employees who finish their work ahead of schedule.
- Receiving positive customer reviews. Customer satisfaction increases the likelihood of retention and future referrals. Organizations may incentivize employees who command positive client attention with a one-time cash payout to encourage these potential scenarios.
- Exceeding quality standards. You may have an employee with close attention to detail who regularly spots potential issues with new products. You can honor this employee and encourage continued contributions by giving them a bonus.
- Contributing new ideas (or creating new products). Many employers have a program to reward employees who creatively contribute to developing new products or offerings.
- Exemplifying effective leadership. Every company needs effective leadership at all levels of the organization. When employees demonstrate leadership in action (or take steps to improve their leadership skills or capabilities), you can encourage and honor their development with a bonus.
Remember, some circumstances aren’t appropriate for performance-based bonuses. When health and safety are concerned, for example, many facilities focus on the numbers and post how many days they’ve been accident free. But rewarding low rates of incidents can lead to under reporting—no one wants to be the reason everyone in the facility lost a bonus.
When developing your incentive plan, be sure to consider when you should reward results, and when you should reward the behaviors that lead to results.
Types of performance-based bonuses
Performance-based bonuses exist in several forms. Some are monetary, but many involve other incentives. Each team is unique, and may respond differently to different types of bonuses. Think about specific team members as you continue learning about the different bonus types.
Commission-based bonuses are customary when employees bring in money for the organization. Employees who bring in a large lump sum for the company often receive a commission-based bonus. It’s usually a win-win for the worker and the organization.
Some companies offer commission-based bonuses when employees top a certain threshold during a defined period (such as a month or year). Other organizations compensate employees for specific sales that exceed a certain amount.
In some professions, commission-based payouts are the employee’s primary compensation method. They may have a small base salary and receive most of their income from individual sales. The amount varies between organizations and industries, with 20% to 30% being a typical range.
Spot bonuses are more spontaneous than other types of bonuses. You may have an employee who goes above and beyond to reach company goals or further their level of impact or performance. In that case, you could give them a spot bonus to honor their recent achievements and encourage similar employee engagement among your team.
Imagine that you’re leading a marketing team as they prepare to launch a new project. The work has been more demanding than expected, and all employees feel pressure from the upcoming launch. One particular employee is staying late, coming in on weekends, and leading the charge toward meeting the deadline and producing quality work.
Once the project launches, you could offer this employee a discretionary bonus, such as tickets to a local professional sporting event or an overnight stay at a nearby luxurious hotel to honor and reward their exceptional performance.
Fringe benefit bonus
Fringe bonuses could include free lunches, paid gym memberships, or tuition assistance for employees who meet specific criteria or accomplish certain goals. You could institute a plan where employees who refer a new client to your organization receive a $50 gift card to the restaurant of their choice. Some supervisors also acknowledge when employees willing to go the extra mile receive excellent customer reviews.
Some companies offer employees a retention bonus once they reach a particular milestone. This landmark could be a certain number of years in their role or a new achievement, such as earning a new certification or reaching a performance record.
For example, you may reward a salesperson with an extra three paid vacation days or a weekend getaway paid for by the company if they exceed their sales numbers from the year prior.
How to implement a performance-based bonus program
Instituting performance-based bonuses in your organization is easy when you follow the steps below. Not only will you know what you must do to put the program in place, but you’ll also ensure you’re moving forward in a way that benefits your company and helps employees reach new goals and standards.
- Determine performance goals and objectives
- Consider bonus programs in your industry
- Determine the best type of performance-based bonus
- Accurately track employee performance
- Reward employees for a job well done
1. Determine performance goals and objectives
Start by thinking about your employees’ current performance. Identify areas where improvement and growth could help take your team’s performance to the next level. Determine if there’s an apparent deficiency or limitation that your team could intentionally work to improve.
From there, consider what specific goals or standards you’d like your team to reach. Your target should represent a degree of manageable difficulty for your team. You don’t want the goal to be so easy that it doesn’t represent real progress for your organization. You also don’t want your employees to get bored and lose interest.
At the same time, the goal should be manageable for your employees. They’ll become discouraged if they don’t feel like they can reach the standards you’ve set. Make every effort to choose a goal that pushes your employees to perform without stunting their growth or progress.
2. Consider bonus programs in your industry
You don’t have to reinvent the wheel when creating a program for performance-based bonuses. Consider what other companies in your industry are doing to determine the most useful or effective tactics for your organization.
While this information can be helpful, you don’t have to copy what your competitors are doing. Feel free to put a creative spin on others’ ideas to make them more relevant or applicable to your scenario. You know your team as well as anyone, which qualifies you to make choices about what will best motivate your employees.
3. Determine the best type of performance-based bonus
With an understanding of the different performance-based bonuses, and which are popular in your industry, you can select the bonus structure that will best motivate your team.
Consider using a mix of monetary and nonmonetary incentives in your performance-based bonus plan, and scale the incentives with the achievement. Some employees find the potential to increase their earnings more motivating, while others might be more driven to earn increased flexibility or additional career advancement opportunities.
You can—and likely should—tailor the bonus to the role as well as the achievement. However, you’ll also want to be fair to everyone. Avoid creating a bonus structure that will incentivize some roles but not others, or that will penalize people who aren’t associated with a department.
Where the operations department might have a bonus structured closely with a facility’s output, human resources could have metrics designed around recruitment, retention, and compliance, for example.
Consider soliciting feedback from team members before formally establishing a performance-based bonus plan. This allows you to gauge how team members will receive the plan and what incentives may have the greatest impact. Employees will also feel more ownership when contributing to the decision-making process.
4. Accurately track employee performance
Track employee performance so you know when employees meet performance goals. You’ll know when to reward employees and be able to do so promptly so that employees feel recognized for their performance.
Consider applying the SMART goal framework to create specific, time-bound, and measurable goals. Employees will have an easier time pursuing goals if they are clear about what you expect from them. By setting specific and measurable goals in advance, you’ll have a better opportunity to define success, as well as to progress and incorporate this vision into the goals.
5. Reward employees for a job well done
Employees who receive performance-based bonuses will feel like their contributions are appreciated and valued. This recognition can encourage continued high performance—both for the employee receiving the bonus and other team members who take notice.
You should periodically revisit employee goals to ensure they’re realistically attainable and appropriately challenging. If employees meet goals regularly, raise the bar. If the goal seems too challenging, consider if the goal is too difficult.
Find the best talent for your team on Upwork
Performance-based bonuses tend to be mutually beneficial for employees and companies. They can encourage high-performance levels and create a company culture of recognition and affirmation for high-performing employees. They may also increase employee retention and limit turnover in your organization.
Hiring the right talent for your team is essential to maintaining effectiveness and productivity. Thankfully Upwork makes hiring easy through our extensive online talent network. You can post jobs on Upwork and find talent that possess a diverse range of skills for your business needs.