Top 5 Different Types of Employee Bonus Programs for Your Small Business

Do you give your employees bonuses in your small business? According to PayScale’s 2018 Compensation Top Practices Report, almost three-quarters of small businesses offer bonuses.

Companies can reward top performers with bonuses, also known as “variable pay”, without increasing fixed salaries.

PayScale reports that top-performing businesses are more likely than average businesses to offer bonuses (79% vs. 70%). According to a 2018 WorldatWork study, bonuses are increasing in popularity, particularly among small and medium-sized businesses.

Employee Bonus Programs

Let’s take a look at some of the most popular employee bonus plans, and how you can make them work for your company.

Annual Incentive Bonuses for Individuals and Teams

Individuals or teams who achieve the goals established at the start of a performance cycle receive an annual incentive bonus.

PayScale reports that more than half of the companies use individual incentive bonuses, while 23% use group incentive bonuses. When group effort is needed to achieve a tangible result, team incentive programs work best. Individual efforts can be difficult to quantify.

Create a motivating annual incentive bonus program:

• Establish clear, consistent, and measurable goals that tie to the roles of each person or team member.
• Employees need to understand the relationship between their actions and the overall goals. Problems can arise when employees aren’t working as hard as their colleagues and don’t get the same benefits from team incentives. This can be avoided by ensuring that the team works together to achieve the goal.

Spot Bonuses

PayScale reports that 39% of companies use spot bonuses to reward good behavior. Spot bonuses can be given for exceptional customer service or going above and beyond.

Spot bonuses at large companies can amount to several thousand dollars. For small businesses, however, it is best to keep them modest — $25 and above will be acceptable.

Create a Motivating Spot Program:

Give out different levels of spot bonuses. For example, a $25 gift certificate for the most energetic person at the company booth. You could also give $500 for an even more extravagant action.

Establish a budget. Spot bonuses can quickly consume capital if there is no limit. You don’t have to spend all of your spot bonuses if you don’t see the right employees.

Make it count. Offer spot bonuses for exceptional behavior and not just for performing the job.

Surprise employees with surprise spot bonuses. Employees who know that two people receive one each week lose their motivation. Spot bonuses should be given irregularly to keep employees guessing.

Make it known. One of the rewards of a spot bonus is being recognized by your colleagues for your work. So make sure to award spot bonuses to all staff members. It can be publicized by sending an email to the entire company or making an announcement.
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Referral Bonuses

PayScale reports that 39% of companies use referral bonuses. Referral bonuses are given to employees who refer job applicants who are hired and who complete a probationary period. It is believed that birds of feathers flock together, and if an employee refers someone, they are more likely to hire them.

To create a motivating referral bonus program:

Create a policy. Are you looking to offer referral bonuses for all jobs or just for specific positions? Are you looking to create a referral program or notify employees when you are hiring and ask them for referrals?

Decide how you will handle payouts. Some employers pay a portion of the referral fee when an employee is hired, while others pay the remainder after the employee has completed a probationary period that lasts three to six months.

Some companies give the whole bonus upon completion of the probationary phase. Regardless of the situation, ensure that your policy is written.

Offer higher referral bonuses to:

• Referring candidates that increase diversity in the staff.
• Referring candidates that are high performers.
• Refer candidates with rare skills or for difficult-to-fill positions.
• You could offer a small referral bonus of $25 or $25 depending on how difficult it is to find candidates.

Signing up or hiring bonuses

Signing or hiring bonuses (given upon hire) can be a great way to attract and motivate new employees. 34% of respondents in PayScale’s survey used them. Small businesses are less likely to use them, but signing bonuses could be a good idea if they:

• These bonuses are common in your industry. IT workers are familiar with signing bonuses.
• Attracting a candidate with difficult-to-find skills is essential.
• Motivate a candidate to leave another state.

A signing bonus is a great way to attract employees for small businesses with low starting salaries. Signing bonuses can backfire if the bonus is used to help job-hop.

It’s a good idea to stagger your signing bonus to prevent this. Half of the bonus might be paid at signing. Then, one-quarter of the bonus after six months.

The rest will be paid at the end. Many companies have “clawback” provisions that require employees to return a portion of their signing bonus if they quit before one year has passed.

Signing bonuses are not enough to attract and retain employees. To keep your employees motivated and loyal after the first year, you need to have a comprehensive employee development plan.
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Profit-Sharing Plans

Profit-sharing is much more popular with small and medium businesses than it is for larger ones. 22% of the 2018 Variable Pay Playbook small companies use it.

These plans allow employees to receive a portion of the company’s annual or quarterly profits. Employees are eligible for a percentage of the company’s annual or quarterly profits if you have a better year than usual.

You can tie profit-sharing plans to your company’s 401(k), with the profits being distributed as retirement plan contributions or on a cash basis.

To create a motivating profit-sharing plan:

• Profit-sharing plans are very motivating as they give employees ownership of the company. Employees should be able to understand the operation of the profit-sharing plan.
• You must set parameters that limit who can participate. Employees must be employed for at least one year to participate in this program.

Particularly if the profit-sharing plan is tied to 401 (k), there are specific regulatory requirements such as maintaining certain records, reporting requirements, and setting up trust funds.

For assistance, speak to your accountant or third-party financial advisor. For more information, please refer to the Department of Labor’s Guide for Profit Sharing Plans for Small Businesses.
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Tips for Bonus Structure

• Make sure you know how much money is available for your bonus plan. This could be a dollar amount (you have $5,000 per year to put aside for discretionary or spot bonuses). This could be a percentage of income for longer-term bonuses such as incentives or profit-sharing.
• The plan should be based on quantifiable and measurable results. Define the goals and describe how progress will be measured.
• You might consider setting “tiered goals” so employees can achieve more difficult goals and receive different bonuses. A worker might receive $X to reach the minimum goal and $XX to achieve the maximum.
• Send us your bonus plan.
• Make sure that employees are aware of what they need to do to receive the bonus. The plan should be reviewed with all employees, as well as individuals in the case of an individual or team incentive bonuses.
• Employees can be kept focused by setting milestones and reviewing progress quarterly to ensure they receive long-term bonuses. These checkpoints may be a good opportunity to offer small bonuses.