Which Bonus Structure Is Best for Your Company?

According to research by consulting firm Aon Hewitt, more than 90 percent of U.S. companies are favoring bonuses over fixed raises to compensate valuable employees.

Odds are, your company’s in a similar situation. But how do you know what compensation bonus structure will best motivate workers?

To answer this, Software Advice surveyed nearly 200 full-time employees, asking how their employer’s bonus structure compares with what they actually want.

In this article, we present the results of that survey, along with suggestions on how dedicated payroll software can make bonus administration easier.

Key Findings

  • Seventy percent of workers prefer bonuses tied to individual performance over those tied to department or company performance, or not tied to performance at all.
  • Forget hit-or-miss awards: 73 percent of workers would prefer to make a percentage of their performance-based bonus for hitting a percentage of their goal.
  • Among one-time bonuses, spot bonuses for special effort (63 percent) are preferred over retention, signing or employee referral bonuses.
  • Opinions on bonus timelines are divided: 54 percent prefer smaller monthly bonuses, while 46 percent prefer a larger annual award.

Workers Prefer Bonuses Tied to Individual Performance

When restructuring recurring, performance-based bonuses, companies generally have three options to offer employees:

  • Bonuses not based on performance (e.g., a Christmas bonus)
  • Bonuses based on department- or company-wide performance
  • Bonuses based on individual performance

From a worker perspective, there are pros and cons to each. A bonus not based on performance is guaranteed for all who are eligible, but the potential payout tends to be relatively small.

A bonus based on individual performance can offer the most lucrative opportunity—but, by design, it requires workers to meet often-rigorous performance goals.

When we ask workers which option they prefer, the favorite is clear: 70 percent prefer a potentially large bonus tied to their individual performance over a bonus based on group performance, or not tied to performance at all.

The result is the same, regardless of age, department, industry or management level.

 

Preferred Bonus Type

Paying out a significant year-end bonus to every employee in your business can make headlines. But if employees expect to get the same bonus regardless of their performance, there’s no incentive to work harder. In fact, it could even serve as a negative incentive, encouraging workers to only do the bare minimum.

Dr. Michael Gibbs, professor of economics at the University of Chicago Booth School of Business, says department- or company-based performance bonuses also send the wrong message.

“Best performers will tend to get cynical when a company rewards something else, like the performance of the board or everyone collectively. A bureaucratic approach to incentive pay basically means no incentive in the end. All you’re going to do is make people cynical and disappointed.”

To promote motivation and retention among your best workers, rewarding bonuses based on individual performance is best. This method involves the most work—but software can help:

    • Payroll software can ensure that bonuses end up in bank accounts, appropriate taxes are withheld and line items align accurately with the general ledger.

Even if you can’t afford a complex system, such as the ones for compensation management, an integrated HR suite can still aid in your bonus efforts.

Christian Valiulis is chief revenue officer of workforce management system vendor APS Payroll. He says having a core HR suite with integrated payroll and performance management capabilities can help facilitate communication between departments—which is necessary when doing performance-based bonuses.

“Managers are doing the reviews and making their recommendations to HR, and then HR … makes the pay rate change, [commits] it to the record and [runs] it through payroll,” Valiulis says. “Having an integrated system facilitates that communication and collaboration between employees, managers and HR.”

Managers can recommend bonus amounts to HR in APS Payroll
 

Even if you already have a payroll or performance management system in place, multiple solutions can be integrated to create a seamless process. Make sure any new software you choose can work with your existing systems.

Ditch Hit-or-Miss Bonuses

Once you’re monitoring individual performance and doling out bonuses accordingly, you might be tempted to keep things “black or white” to make administration easier: If workers hit their target, they get their bonus. If they miss it, tough luck.

However, this approach can backfire. It turns out employees don’t like it, either: 73 percent of workers in our survey prefer tiered performance bonuses over “hit-or-miss” bonuses.

 

Employees’ Preferred Bonus Structure

Hit-or-miss bonuses have two negative effects:

    • High performers with nothing else to work towards will call it a day after hitting their mark.
    • Lower performers won’t even attempt to reach their goal if there’s a risk their efforts could all be for nothing (e.g., if a salesperson has an annual goal of 300 sales, why work harder and risk getting no reward for 299 sales?).

So, what’s the solution? Set multiple performance goals for each employee, and reward them a percentage of their bonus for hitting a percentage of their goal.

This way, you can promote continuous effort among your employees without seeming unfair. It’s a small consideration, but one that is often overlooked.

Employees Prefer Spot Bonuses for Special Effort

One-time bonuses given out for specific actions can also motivate employees. These may include:

  • Employee referral bonuses
  • Retention bonuses during mergers and acquisitions
  • Signing bonuses
  • Spot bonuses to acknowledge special effort

We asked employees which of these one-time bonuses they’d prefer, if they could only be eligible for one. Sixty-three percent say they’d prefer their company offer spot bonuses.

 

Preferred One-Time Bonuses

According to research by HR association WorldAtWork, spot bonus programs are on the rise: They were only used by 43 percent of companies in 2010, but jumped to 60 percent of companies in 2014.

Spot bonuses are often up to managers’ discretion, and limited to small amounts ranging from $25 to $500—but they’re a great way to reward and acknowledge special effort by employees.

With a modern payroll system, managing spot-bonus budgets and allocation is simple.

Many systems allow for ad hoc payroll amounts to be added to payroll runs: For example, if Employee A gets a $37 spot bonus, you can add that amount to their paycheck manually.

Some systems, Valiulis adds, allow users to set amounts for custom line items that can dropped in with one click: Employee A gets a “Bronze Level Spot Bonus,” which is automatically $37.

 

Adding preset bonuses in APS Payroll
“You can get as granular as you want to get, because you can completely customize your income items,” Valiulis says. “Anything that needs to be done around an income item or deduction is already done, so the taxation is all going to be accurate.”

Monthly or Annual Bonuses? The Vote Is Split

For all of our findings, respondents generally agree on what option is best—except one. When we ask respondents if they’d prefer to get 12 monthly bonuses or one annual bonus, there’s no clear favorite.

Fifty-four percent prefer monthly bonuses, while 46 percent prefer an annual bonus.

Even when broken down by age, department or management level, the results are similarly conflicted.

 

Preferred Recurring Bonus Timeline

When deciding what timeline to follow at your organization, ask your employees what they prefer through a random survey.

If results at your workplace are similarly split, you may have to consider other factors. Gibbs says the nature of the employee’s job is a crucial one.

“In some jobs, it doesn’t make sense to measure and reward performance every month. In almost any kind of white-collar job, the things you do have long-term effects, and trying to measure them month-to-month doesn’t make sense. In a sales job or a customer service job, maybe it does, though.”

Dr. Michael Gibbs, professor of economics at the University of Chicago Booth School of Business

You may decide to have different bonus timelines for different jobs. If that’s the case, you can use your payroll software to set up various timelines, then link them with your accounting general ledger to keep things organized.

Use Software to Handle Your Performance-Based Bonuses

If there’s one trend that ties our findings together, it’s this:

Workers—regardless of age, industry, management level or department—want their bonuses to be as closely tied to their performance and their impact on the business as possible.

It can be challenging to administer these types of bonuses—but Gibbs says it’s a worthwhile endeavor.

“It’s important to motivate and reward your best performers. You have to identify them and you have to reward them, and you’re going to get a lot of benefit out of doing so. It’s the kind of headache that you should be taking on.”

Dr. Michael Gibbs, professor of economics at the University of Chicago Booth School of Business

Here are the key things to remember when designing your bonus structure:

  • Creating an effective performance review process is priority number one. “Spend the most time worrying about evaluation, trying to do it carefully [and] trying to avoid evaluations that are too narrowly focused,” Gibbs says.
  • Meet employee preferences in the middle. Have employees fill out a random survey to get exact details on what types of bonuses would motivate them. Then determine how you measure success and what resources you have available. This will lead to a solution that satisfies management, HR and employees alike.
  • Integrate technology to maximize communication and automation. Awarding performance-based bonuses takes effort from multiple departments. By integrating payroll, performance reviews and even accounting in one software system, you can create a seamless bonus process with less errors and duplicate entry.

In the market for one of these systems? Give our Software Advisors a call at (855) 998-8505 for a free, 15-minute phone consultation to determine the best system for your needs.

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