8 types of bonuses

If you decide to offer employee bonuses, you have numerous options to consider. Explore these bonus types before launching your program to determine which has the potential to meet your goals.

1. Referral bonuses

A referral bonus thanks current employees for bringing new talent to your company. Some companies only award referrers, while others pay the person being referred as well. Either way, the bonus should have specific conditions, such as a requirement for at least 90 days of employment before payout.

2. Signing bonuses

Companies give employees signing bonuses when they sign contracts to work for them. Sometimes referred to as sign-on bonuses, signing bonuses help attract and retain quality talent. 

Payment timelines and amounts usually vary by employer and the position. For example, some companies pay signing bonuses the moment new hires sign their initial paperwork or at their first paycheck. Others, however, may require employees to work a set period before providing bonus payments.

3. Spot bonuses

Spot bonuses are discretionary rewards given after a project or as recognition for individual or team success. Generally unexpected, these employee bonuses make those who receive them feel recognized and valued. Companies usually offer these bonus types to a broader employee base rather than senior management.

Amounts can vary, depending on factors such as the type of work you’re rewarding and an employee’s time with the company. 

4. Incentive bonuses

Companies struggling to meet quotas or deadlines might consider offering employees an incentive bonus. Rewarded to workers who attain specific business goals, these employee bonuses benefit both employers and workers. For example, an employer might give incentive bonuses for a certain number of sales or increased production of goods.

You can also write these bonus types into employment contracts. For instance, you might provide an incentive bonus in the form of a shift differential to entice employees to work nights or weekends. Project agreements also benefit from these employee bonuses when workers get paid more for completing them on time or ahead of schedule.

5. Profit-sharing bonuses

Profit-sharing bonuses reward employees based on the company’s success. These bonuses drive productivity by ensuring employees understand how their performance directly impacts your business’ bottom line. For example, your company might set aside anywhere from 2.5% to 15% of annual profits and then distribute them to workers as employee bonuses.

Often called annual bonuses, these payouts motivate employees to work hard, suggest innovative ideas and exceed goals. This type of compensation often significantly impacts company culture because it encourages employees to become engaged, invested profit-sharers.

6. Holiday bonuses

Different from year-end annual bonuses based on company profits, holiday bonuses are gifts to workers, typically based on a percentage of their annual incomes or even up to an extra month’s pay. 

When awarding a holiday bonus that’s not based on income, consider making sure each employee receives a fair amount by paying everyone the same amount or providing a set amount for each year the employee has worked for your organization.

7. Retention bonuses

Businesses sometimes pay retention bonuses to employees who agree to stay with the company or a project for a given period. Usually paid at the end of a calendar year or the completion of an objective, retention bonus agreements sometimes pay out every year an employee stays. These employee bonuses work well when your main objective is reducing employee turnover.

8. Noncash bonuses

Employees often picture a bonus check when it comes to incentive programs, but some employers provide noncash bonuses instead. Noncash bonuses include gift cards, company gear such as jackets or sweaters and the use of a company vehicle or timeshare. You might also provide extra PTO or floating holidays as a noncash bonus.

Publicly traded companies sometimes offer non-monetary stock as employee bonuses. These structures provide a set number of company stocks to employees based on their tenure with the company. These usually vest at a later date, so workers can’t sell their shares right away.

Benefits of offering employee bonuses

Employee bonuses can be demonstrable proof of a job well done. Such rewards create excitement for newer or tenured employees, and bonus payments can help workers feel appreciated. 

Below are some of the potential benefits of an employee bonus program.

1. Improved productivity

When employees feel like you appreciate their efforts, they may work harder. Different types of bonus payments can also increase productivity by rewarding output, such as a specific goal for task completion or strong sales figures. Friendly competition can also potentially boost productivity, especially when teams vie for department bonuses or top-seller awards.

2. Increased morale

Employee burnout can make workers feel physically and mentally drained, but bonuses can be morale-boosting for your team to show them their work matters. When you reward workers with financial incentives, they feel good about their performance and typically continue doing their best.

3. Larger applicant pool

Word gets around when a company treats its employees well, and praise for bonus programs may attract new employees who want their performance appreciated. Advertising an employee bonus program when you’re looking for new hires may also encourage quality applicants to apply.

4. Improved collaboration

Consider creating shared goals for your company so employees work together to achieve a team bonus.

5. Reduced turnover

Employees who feel valued are more likely to stay at their current company. Bonuses offer yet another reason to stick with your company instead of taking their talents elsewhere.

How to implement a bonus program

Implementing and managing employee bonuses effectively keeps things fair and ensures workers have a positive impression of the program. Consider these steps to create a bonus program that avoids misunderstandings and enhances worker satisfaction.

1. List company priorities for improvement

What does your company need most? Profits or sales make good choices, but what other company goals help achieve these things? Do you need to attract new talent, retain high-performing staff or reward especially productive employees? Think about your company goals to understand how you can motivate employees with bonuses to help you achieve them. 

2. Think about what you can afford

Review your finances and allocate a portion of your budget to bonuses. Discuss your budget with your accounting team to provide fair employee bonuses that still keep your books healthy. You can decide on a set amount or a percentage of profit based on monthly, quarterly or yearly earnings. Determine the best time for your company to give out bonuses and how often you plan to do so.

3. Assemble your leadership team

Take your ideas for types of bonus programs plus their frequency, timing and projected budgets to your leadership team. During the meeting, consider different performance measurements for all areas of the business and which bonus types have the most likelihood of driving desired results.

4. Establish a set timeframe for awards

Ensure employees know when to expect their bonus payments. Many companies pay out bonuses quarterly or annually, depending on the company type or its size. Details about bonuses should be communicated with employees upfront. These established expectations help prevent any misunderstandings or frustration with the process. 

5. Create clear eligibility guidelines

Transparent communication concerning employee bonuses keeps guesswork to a minimum, so consider putting everything in writing to ensure employees have easy access at all times. Lay out bonus structures for each program you offer so employees know exactly what they must do to earn these incentives. Send a list of expectations and qualifications out in an email, and be sure to include it in employee handbooks. 

6. Make a plan

After you’ve consulted your executive team, HR and any other stakeholders, make a plan for managing your bonus program. Change any employee-facing documents before you implement the program so you already have everything ready to go when you announce the plan to employees.

Consider these important things when writing your plan:

Timing:

• When does the company provide bonus payments?

• What schedule does management use for reviewing budgets and determining performance-based budgets?

Managing performance-based reviews:

• Who reviews and approves performance-based bonuses?

• What criteria does the bonus program have?

• Who reports the information for performance-based bonuses?

Announcements to employees:

• How do you plan on announcing employee bonuses?

• When do you announce each bonus type and who is the appropriate audience for the announcement? 

• What details should you include in the announcements?

7. Announce to employees

Announce the work bonus program to employees. If you’re announcing bonuses that apply to all employees, a company-wide email offers an effective way to broadcast the news. For incentive and performance-based employee bonuses, consider having managers discuss the news with individuals and teams who received the bonus.

8. Celebrate achievements

When employees earn bonuses—big or small—it’s time to celebrate. Schedule monthly or yearly office parties to honor workers with their team bonuses. You can also send out a company newsletter that lists bonus recipients so employees don’t have to wait until the next ceremony for acknowledgment.

Boost morale and show workers you value their efforts by implementing employee bonuses. Compare different types of bonuses, and choose the incentives that work best for your company’s budget and goals.