Do employee bonus schemes have a tangible effect on workplace morale? When it comes to bonus schemes is there a certain type that works best? Can an employee bonus really have an effect on how hard (or how well) people work?
These are all important questions to answer if you run a business, which is especially true if your business is small with profit margins tight.
In this article we will explain all the benefits of a bonus scheme, what exactly a discretionary bonus is, as well as discuss the various types of work bonuses you can employ as a business owner.
Let’s get started.
What are employee bonus schemes?
A bonus scheme is a form of reward in an amount of money that you, as an employer, give to your employee on top of their standard wage. This sum of money is usually awarded for a specific reason, such as hitting an objective, or seasonally, like a Christmas bonus.
The money can also be paid in different ways other than cash. For example, a business may offer a voucher or some other experience as a bonus that has a monetary amount to the business but provides employees with a different type of incentive.
What are the different types of bonus scheme?
Bonus schemes are typically structured as one of the following:
- Individual bonus scheme. These focus solely on individual employees and their targets. If the employee meets the goals set, they receive a bonus. Individual bonuses can be non-discretionary (contractual) or discretionary (see later).
- Team bonus scheme. These reward the team that succeeds in hitting their goals. Team bonus schemes offer greater encouragement to an entire team and can help foster a positive team spirit. It can also encourage healthy competition between teams.
- Company-wide bonus scheme. These encompass all teams and employees. They usually serve as a focal point for everyone by stating the most critical goal the company wants to accomplish. Company-wide bonuses don’t have to be performance-based and may just be a seasonal reward, as is the case for Christmas bonusses.
Bonus schemes can involve a combination of any of those mentioned above. So, an employee might have their bonus scheme tied to both their personal performance and their team’s performance, as well as receiving a Christmas bonus.
On top of this, it’s important to note that bonusses can take two different forms:
- Monetary based cash rewards. These are often paid in the form of cash directly into an employee’s wages.
- Non-cash rewards. Non-cash rewards like recognition (employee of the month) and in-kind rewards (free yoga sessions, paid trips, vouchers, gift cards, etc.) are popular in many workplaces as they often cost businesses less money than monetary rewards.
What exactly are contractual and discretionary bonus schemes?
Businesses operating in the United Kingdom need to be mindful of two main types of bonus schemes: discretionary schemes and contractual bonuses.
Contractual bonus scheme
A contractual bonus is a bonus scheme that has certain requirements that need to be met. This is typically written out in an employment contract. If targets are met, the employer is legally bound to pay that bonus.
Discretionary bonus scheme
A discretionary bonus has no contractual obligation. A manager or business owner can pay the bonus at any time and in any amount. Since it’s not written in the employment contract, employees are not entitled to receive a discretionary bonus and the amount of the bonus can vary at the employer’s discretion.
Even though discretionary bonuses have no contractual obligation, if they are offered, business leaders should still provide a clear structure for them. This can help motivate employees who will be more satisfied and work toward their goals due to the transparency of the system.
How do employee bonus schemes work in the real world?
Bonuses work best when they are simple, tangible and understandable. Here are five of the most popular bonuses used in modern organisations:
- A percentage of employee salary
- A flat payment (lump-sum payment)
- A percentage of sales
- A commission
- A share option
The point of a work bonus isn’t for an employee to sit and read the bonus scheme for hours, trying to understand it. By keeping it simple, you set a clearer path between employee motivation, performance and rewarding that great performance.
What are the benefits of a discretionary bonus and bonus schemes?
A bonus scheme can be used as a perk for joining and staying at a company. If top performers know they will get rewarded for the great work they do, they will want to stay longer and work even harder.
Some of the core benefits of implementing a bonus scheme include:
- Talent Attraction. Bonuses can bring more applicants to your job adverts and, subsequently, into your company.
- Motivation. Whether it’s an individual, team or organisational bonus, bonuses can lead to a more motivated workforce.
Do bonus schemes work?
Bonus schemes work, but you need to be careful about implementing them and the expectations (and motivation) they set.
For example, if discretionary bonuses are solely focused on cash, you might incentivize employees only to seek work that will get them that bonus.
You should balance cash bonusses with recognition bonuses and ones that have an internal gratification for the employee to ensure the right motivation.
Bonus schemes and discretionary bonuses can be good for your business, but only if you approach them with the right level of intent. You need to know what it is you want to motivate in your workforce and how you want to achieve it.
That may require a larger conversation around the topic of goals, performance and the total reward strategy in the company. After all, a bonus without purpose is simply throwing money out of the window – with little effect on your workforce.
Employee bonus schemes can be vital for many businesses to keep their workforce motivated and happy. But it’s a fine line between having a great bonus scheme and one that is expensive and ineffective.
We hope you’ve enjoyed this guide. For more useful workplace information, check out the rest of our website.