Performance Bonus – Meaning, Usage, Advantages and Disadvantages

Performance bonus is defined as a type of compensation that an organization provides to its employees who go beyond the scope of regular working hours or expected duties to pull off excellent work. These are used as powerful incentives for increased productivity in the organization.

What is a performance bonus?

An organization generally sets targets at the beginning of the year that its employees must achieve if they want to become eligible for the performance-based bonus policy. This plan is a type of incentive offered to the employees to perform exceptionally well and complete their assigned tasks and responsibilities within the given timeframe.

Performance-based bonus is offered on an ongoing or regular basis like annually or half-yearly. This is considered one of the best ways to retain top talent and keep them satisfied.

Important points related to a performance-based bonus are-

• The terms and conditions should be straightforward and easy to understand to all the stakeholders, including the management which is going to provide it and the employees who will be eligible for it
• The bonus plan should be fair and equitable across all the departments and employees of the organization
• The employees should receive the bonus either after completing their task satisfactorily at the end of that period or the new period. The organization should not defer it indefinitely
• The performance-bonus plan should be significant, meaningful, and must have relevance so that the employees feel a sense of fulfillment.

How to use the performance-based bonus effectively?

Some of the steps to use the performance bonus template effectively are

1. Choose the right objectives 

An organization needs to choose the right objective if it is looking for steps to effectively use the performance-based bonus. There are several ways to develop the plans. The company can create a bonus pool and disperse the funds to employees who can meet defined specifics.

The performance-based bonus should be directly connected to measurable objectives associated with the organization’s goals and the workforce’s contribution to these goals or the bottom line of the financial statement.

The company can also use SMART guidelines to their advantage as this will help define what, whom, how things should be done, and how the outcomes will be measured within clear deadlines, milestones, and time frames.

2. Consider a profit-sharing plan 

It becomes difficult for a start-up company to give a bonus to its employees. Consider a profit-sharing plan if you are looking for steps to use the performance-based bonus effectively.

This will nudge the employees to focus on the long-term success of the business. The start-up company can opt for any profit-sharing plans like a registered profit-sharing pension plan, deferred profit-sharing plans, employee profit-sharing plans, and cash plans.

In the cash plan, the employee will receive his share of profit at the end of the fiscal year, but the rest are placed in a trust fund to accumulate interest.

3. Documentation 

Document it if you are looking for steps to use the performance-based bonus effectively. Put the performance-based bonus plan in writing with all the details to benefit the employees and the management.

4. Make the reward a strong incentive 

The bonus amount should be significant; otherwise, employees will not be encouraged to work more for an insignificant amount. Make the reward a strong incentive if you are looking for steps to use the performance-based bonus effectively.

5. Review your plans regularly 

There are other types of performance bonus policy which an organization can use like stock options and grants. It is essential that whichever plan it uses, the implementation process should be smooth, and all the employees must be aware of it so that they can work for it.

Review your plans regularly plan if you are looking for steps to use the performance-based bonus scheme effectively.

Benefits

The benefits of performance-based bonus are as follows-

• The performance-based bonus is considered beneficial because it helps to motivate the employees to go beyond their typical call of duty and do outstanding work
• The bonus plan helps the employees to improve their performances and help the company in achieving its goals and objectives
• When an organization has the culture of offering a performance-based bonus, it can attract talent. The prospective applicants want to join the company that recognizes talent and is willing to go the extra mile and pay additional for it
• The performance-based bonus is considered beneficial because it results in low employee turnover
• The lure of performance-based bonus helps the company in employee retention
• The rate of absenteeism is lower because most of the employees are working hard to become eligible for a performance-based bonus

Disadvantages of performance-based bonus

Performance-based bonus is not always associated with something positive as, like everything else in the world, there is a bad associated with the good. If not designed and implemented properly, it can lead to unwarranted and unintended consequences. Some of the repercussions of performance-based bonus are as follows-

• Sometimes to do exceptional work, people start taking shortcuts, and at such times the good incentives like performance-based bonus lead to bad decisions
• The performance-based bonus policy can easily become a de-motivator for an employee when he becomes accustomed to it to the point that he starts considering them his right. If in case he does not receive the bonus, it can create serious repercussions for the organization
• If one team member receives an amount under a performance-based bonus scheme and the rest are ignored, it will create division within the team and lead to bad precedence. In such cases, group loyalty is replaced by individual

Conclusion

The performance bonus is based on subjective criteria. It is generally given in the corporate environment to either an individual employee or a team for meeting a specific target or goal.

In some cases, it is also given in recognition of exceptional work even though the employer is not contractually obligated to pay it. It has always been a favorite method of organizations to boost efficiency, productivity, and profitability.