Bonuses include rewards to stimulate the efficiency and motivation of employees in various fields of activity. Unlike a mandatory salary, a bonus is an additional financial bonus that a business entity can provide to fulfill certain conditions, achieve high results, or get special merits. In modern business, awards are essential in shaping corporate culture, attracting and retaining talented staff, and improving the organization’s overall effectiveness. In this article, we will look at what employee payments are considered bonuses, various types of bonuses, their features and applications in management practice, and their impact on motivation and productivity.
What is a bonus?
Bonuses refer to additional monetary rewards for employees (the primary remuneration of employees is wages). In economic terms, a bonus is an incentive payment. Companies do not register items and other property as bonuses, although the company can encourage employees not only with money. Awarding employees is not a company’s responsibility but a right. Usually, bonuses are paid for the past period after evaluating an employee’s work results. Still, there are bonuses for specific events that are not tied to the performance of employees.
Where do the indicators for bonuses come from?
The indicators for bonuses in the company are set in internal documents. These documents may include a provision for bonuses or a provision for wages. Such documents are usually introduced to all employees when they apply for a job.
When no such documents exist, orders are issued on awarding certain employees, which these employees are introduced to under signature.
How is the amount of the bonus determined?
Usually, the bonus is determined as a percentage of the employee’s salary for a month or a quarter. The time that the employee worked (was not ill or on vacation) is also considered.
The amount of the accrued bonus is usually prescribed in the pay slip, and bonuses are paid at the same time as wages.
How to decide on bonuses
The company head usually issues orders on bonuses for ordinary employees based on a memo from the direct head of the employees.
The head of the company decides on the payment of bonuses to the heads of the company’s departments, senior employees, and himself. To ensure transparency in bonuses, an internal document containing indicators for bonuses is recommended.
The bonus system may provide that a certain amount is allocated from the company’s budget to a department (another structural division) as a bonus for a specific work period. The head of the department distributes the allocated amount as bonuses to the department employees. In this case, the head of the department, in the bonus memo, reflects the bonus amount not as a percentage of the employee’s salary but as a certain amount and as a percentage of the department’s bonus budget.
The company head’s order on bonuses is the basis for the company accountant’s award of a bonus to an employee.
What is the withdrawal of a bonus?
An employee may be deprived of a bonus for disciplinary misconduct. In this case, the deprivation of the bonus is “added” to the measure of disciplinary punishment. Such measures include a remark, reprimand, and dismissal. A separate disciplinary measure is the deprivation of bonuses in whole or in part for up to 12 months. Bringing an employee to disciplinary responsibility must strictly comply with the state’s requirements. As for bonuses, in practice, employees who have made mistakes in their work are not awarded bonuses.
For employees with whom contracts are concluded, contracts necessarily provide for a reduction or withdrawal of bonuses of all types, regardless of disciplinary liability for:
- Absence from the workplace for no good reason.
- Late performance or non-performance of work duties without valid reasons.
It is also likely that when an employee is fired, they will not be paid a bonus for the period worked since it does not relate to mandatory payments upon dismissal.
Limits on the size of bonuses
Government requirements limit the payment of bonuses to executives of companies with financial difficulties. In particular, managers are not awarded bonuses when the company owed employees wages, state child benefits, average earnings during working leave (the so-called “vacation”), and final settlement upon dismissal when these debts were formed due to the lack of money from the company.
Bonuses (as well as other payments) to employees whose part of their income is withheld according to executive documents in favor of different persons are limited to the remaining amount after all deductions.
Types of bonuses
There are no specific types of bonuses that all companies should be guided by. The company determines what kinds of bonuses employees will receive, depending on the indicators that need to be achieved in order to qualify for bonuses. It depends on the specifics of the company’s activities. In practice, bonuses are most often paid for the results of financial and economic activities. Usually, the company has financial indicators forecasted. When the company’s revenue reaches or exceeds such forecasts (indicators), this may be the basis for awarding employees of specific departments or all employees for the results of financial and economic activities.
Classification of bonuses
There are several classifications of bonuses based on various criteria that companies can use as grounds for awarding employees:
1. According to the purpose of the appointment:
- Performance Bonuses: These are bonuses for meeting or exceeding performance targets.
- Quality Bonuses: Designed to reward the success achieved in ensuring the quality of products or services.
- Innovation Bonuses: These awards are given for proposals that introduce new ideas, technologies, or processes that improve the company’s work.
2. By frequency:
- Monthly bonuses are paid regularly, usually at the end of each month, based on the results achieved.
- Quarterly and annual bonuses are paid based on the quarter’s results or the year after evaluating the work results over a more extended period.
3. By achievement level:
- Individual bonuses are awarded to specific employees based on their achievements.
- Group awards are intended for a team or department when success is achieved through joint efforts.
4. By source of financing:
- Budget bonuses are paid from a pre-planned budget of the company, a structural division of the company.
- Unplanned bonuses can be accrued from additional, unplanned company income or as a result of successful transactions.
5. Special Bonuses:
- Loyalty bonuses are given to employees who have been working for the company for a long time and demonstrate dedication.
- Bonuses for participation in the promotion of the company, bonuses when the company and employees achieve anniversaries.
Each of these bonuses can be adapted depending on the company’s strategies and goals, which allows you to motivate employees and increase their productivity more effectively.
Why is it essential for employees to know the rules of bonuses in the company
Employees need to know the rules of bonuses in the company. Usually, transparent bonuses in companies (in divisions) are built on the principle of MLM (multi-level marketing) when a direct sales system is used. In other cases, you do not need to hesitate to clarify these rules with HR or your immediate supervisors. Here are the main reasons why this is important for employees:
1. Motivation and productivity
Understanding the bonus system helps employees see which specific achievements can lead to bonuses. This creates an incentive to work more efficiently and purposefully.
2. Transparency and fairness
When employees know the bonus rules, they understand the criteria by which their work is evaluated. This contributes to a sense of justice and prevents possible misunderstandings and conflicts.
3. Striving for new achievements
Awareness of the bonus system helps employees set specific goals in their work. They can focus on what is important to achieve bonus performance and better plan their time and efforts.
4. Skills development
Understanding bonus metrics helps employees focus on learning and developing the necessary skills to succeed in their roles.
5. Evaluation of the results
When employees know what parameters their work will be evaluated, they can better analyze their results and make necessary adjustments. This helps them become more aware and proactive in their activities.
6. Improving team interaction
When the team understands the bonus rules, it can improve teamwork and create healthy competition based on achievements and results.
7. Increase job satisfaction
Employees who understand how and for what they can be rewarded are more likely to feel satisfied with their work, as they can count on fair remuneration for their contribution.
8. Reducing staff turnover
Awareness of the bonus rules can increase employee loyalty to the company, which in turn can reduce staff turnover.
Bonuses have proven to be a useful part of the remuneration package that can equally make substantial differences in motivating employees, ensuring their performance, and job satisfaction. And knowledge of the bonus rules creates a more transparent and productive work environment, increases employee motivation and engagement, and helps the company achieve its goals. With some effective management in the bonus area of their payroll strategy, companies can create a rewarding and motivating work environment that will drive performance and ensure employee loyalty.
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