Sometimes, even the most reputable employer decides that a pizza party or congratulatory email is enough to reward a team or the best performers for achieving company goals.

However, in practice, things are surprisingly different. Surveys show that more than 80% of employees don’t get the recognition they believe they deserve.

Thus, employers today have started rethinking ways to recognize and reward their teams. Recent research suggests that performance bonus is associated with higher motivation and lower company turnover. 

In this post, I will try to clear up everything about performance bonuses and provide insights on how to maximize the impact of these incentives. For those who haven’t implemented it yet, here is a guide on how to do so. Find out more by reading on!

What is a Performance Bonus?

A performance-based bonus (PBB) is an example of a variable compensation strategy companies use to reward or motivate employees. In general, these payments are usually made after specialists meet and achieve their agreed-upon objectives.

Another way to say it is that performance bonuses are given for effective performance, meaning you’ll earn this type of bonus based on how well you perform during the period (monthly, quarterly, or annually, for instance).

For example, a Chief People Officer has a base salary of $150,000, and the company offers a performance-based bonus of up to 30%. What are the conditions under which this bonus is possible to reward?

The CPO earns 30% of the bonus if company employee engagement scores go up by 10% this year. In this case, this top specialist receives a $10,000 performance-based reward for achieving this particular goal.

Types of Performance Bonuses

There are six main types of performance bonuses:

Spot bonus

PayScale research found that these are the second most popular form of variable pay after individual bonus payments.

As the name implies, such a bonus is awarded “on the spot” to specialists or team members without any pre-requirements or conditions. It’s more focused on the most recent achievement that’s clearly contributed to the success of the company.

For instance, employees who cover colleague duties for an extended period may receive a spot bonus. 

Discretionary bonus

Similarly to spot bonuses, these incentives are discretionary awards based on performance and are not too tied to specific metrics. In this case, it is possible to gain them for significant career advancements.

Or awards are given to employees who have done a great job over a long period of time. For example, the company, during a challenging period, decides to grant discretionary bonuses to a group of long-serving employees. It can happen because they consistently show dedication and commitment to the company.

However, it is important to distinguish between spot bonuses and discretionary bonuses. While spot ones are a form of discretionary bonus, they are typically awarded immediately for specific actions. In contrast, discretionary bonuses are generally planned and given for exceptional performance by the employer or manager.

Non-discretionary bonuses

In contrast to discretionary bonuses, non-discretionary ones are given to employees as a way of motivating them to perform at their best. Those who are selected for non-discretionary rewards usually have to meet specific requirements.

A good example here is the practice of hiring bonuses. A software developer will receive a $10,000 hiring bonus if they accept a company job offer.

Milestones bonuses

Milestones or mission bonuses are awarded based on completing tasks with high priority in a short timeframe. An IT team, for example, may receive a mission bonus after deploying a new product website.

Another example is that the sales team achieved KPIs for this sales plan this month, so they are all entitled to rewards.

Profit-sharing bonus

Businesses give profit-sharing bonuses to their employees as incentives for their accomplishments. On top of their base salaries, companies share a percentage of net profits with employees as a way to show their appreciation. 

This type of bonus is influential in terms of its impact on fostering a positive company culture and enhancing employees’ sense of belonging.

Non-monetary Performance-based Incentives

Bonuses based on performance do not only have to be monetary. There are other ways to award and motivate the employee – nonfinancial performance-based bonuses. They can also be a powerful way to show appreciation and increase employee retention.

There are several types of non-monetary bonuses:

  • A recognition program for employees.
  • Professional development courses.
  • An employee leadership training program.
  • Taking extra time off.
  • Health and fitness programs, lunches, and tickets to local events.

Performance bonus: Pros vs. Cons

SHRM shares data from the survey that shows compensation and rewards are key contributors to employee satisfaction. However, things are not as simple as they seem.

Still, among all the advantages the performance-based bonus plan offers, there are some drawbacks, too. To understand the pros and cons, let’s examine both sides.

Advantages of Performance Bonus

  • Increasing Motivation: Performance bonuses can motivate employees to improve their performance, achieve goals, and contribute to the company’s success.
  • Rewarding the Best: The best specialists can be recognized.
  • Talent Retention: Performance bonuses can help retain top talent by providing an additional financial incentive to stay with the company.
  • Goal Alignment: They align employees’ efforts with the company’s objectives by linking rewards to specific performance targets.
  • It’s flexible: Performance bonuses are adaptable to individual, team, or company-wide performance. In other words, it offers flexibility in its use.
  • Competitive Advantage: Offering performance bonuses can make the employer brand more attractive to potential employee candidates.

Disadvantages of Performance Bonus

Another side to performance bonuses is that they pose a number of disadvantages to the company:

  • Cost: If bonuses are large or awarded frequently, they can significantly increase company expenses.
  • Subjectivity and Inequity: Discretionary bonuses can be subjective and dependent on the manager’s judgment, resulting in bias or favoritism. They also tend to create perceptions of unfairness among teams. 
  • Over-expectations: With time, employees might come to expect bonuses all the time. This can lead to a feeling of undeserved entitlement if they are not consistently awarded.
  • Administrative Burden: The process of designing, administering, and evaluating performance bonuses can be time-consuming and complicated.
  • Negative Impact on Team Dynamics: Another fact is that they might create tensions among team members. Mainly if the specific performance metrics or criteria used to evaluate employee performance aren’t clear. 
  • Short-Term Focus: Employees might focus on short-term goals to maximize their bonus at the current time, potentially neglecting long-term strategies.
Advantages and Challenges of Performance-based Bonuses
Financial flexibilityPotential inefficiencies
Rewarding best performersSubjectivity and inequity
Increased employee satisfaction and engagementEmployees may feel mistreated 
Better goal alignment within the companyNegative impact on team dynamics
Talent retentionShort-term focus
Competitive advantage for employersAdministrative burden
Over-expectations from employees

5 Main Steps To Implement a Performance Bonus Plan

Interested in how to motivate, reward, and engage your employees through performance bonuses? Here’s our quick step-by-step guide to implementing your own performance bonus plan:

Step 1: Set Clear Objectives

To start, evaluate the current level of performance of all employees. After that, pinpoint areas where your team could improve and grow. Analyze whether a team is able to overcome a limitation apparent to them.

Set SMART goals

Once that is done, decide what specific goals your team should achieve. You should set SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound.

For example, try to avoid non-specific objectives like “improve team morale.”  Instead, set a SMART goal, which would sound more like “improve team engagement by 20% by the end of the year.”

It would be beneficial to involve employees participating in the target-setting process. They can contribute by giving valuable insights about what their employees believe is achievable.

Step 2: Determine the Eligibility Criteria

The next step is determining how you or your managers will measure performance and how many bonuses you can award. These metrics should directly align with your company’s objectives. They can include individual targets, team achievements, or company-wide goals.

Set a Consistent Schedule for Paying Bonuses

Determine how often you will evaluate employee performance against these criteria. Typically, evaluations are quarterly, semi-annually, or annually—for example, mid-year performance reviews – depending on your plan’s structure.

Step 3: Communicate the Process to Employees

Transparency on bonus eligibility and how to calculate bonuses is an essential part of implementing a strategy. 

Create a Communication Plan

Think about the platforms you will use to communicate with all stakeholders. Will they be just emails or only notifications in Slack or Microsoft Teams? Or Q&A sessions with senior management?

Plan your communication strategy ahead. Decide which platform you will be using, dates, and a short message description. In addition, you should define the results you are looking for from employees after they read a message.

“The key to any successful performance-based bonus plan implementation is clear and transparent communication of all steps of the process.”

Maintain Transparency of Communication 

Open communication throughout the process plays an important role. The purpose is not just to engage employees but also to establish trust and foster a sense of responsibility.

“Employees are more likely to participate actively when they understand the process and its purpose.”

Step 4: Evaluate and Reward

After setting the eligibility criteria and performance metrics, it’s time to assess your employees’ performance. Then comes the best part – fair and transparent bonus distribution.

Performance Evaluation

Carry out regular performance evaluations based on the established criteria. This process may involve quarterly, semi-annual, or annual assessments, depending on your program’s timeline.

Reward the Best Ones

According to your defined metrics, give bonuses to qualified employees. Follow your criteria and be consistent in the process.

Establish a Feedback Culture

Give employees feedback about their performance. Share constructive insights, acknowledge strengths, and identify areas for improvement. This would help to understand what to improve for employees who have yet to receive a bonus. As a result, team dynamics won’t be negatively affected.

Step 5: Regularly Monitor and Adjust

After rolling out the program, periodically check on how it’s working. Gather feedback from your team and be ready to make adjustments to improve the program. This step is all about fine-tuning and monitoring to ensure that the program remains effective over time.

Adjust Plans Details On Feedback

Remember, this process is not set in stone. You can and should adapt it to your company’s unique needs and goals. Regularly review and update the strategy to keep your employees engaged and motivated.

💡 Advanced Step: Hear more from your employees with The platform arms you with quick and custom pulse survey tools. There’s no better way to get your team’s direct, honest feedback when implementing something new in your company. Create a feedback culture with Beams!

Performance Bonus Plan Template

Hopefully, now you know the steps that will help develop and implement a performance bonus plan. You can make the process more uniform within your organization by using a template. 

Here is a ready-to-use template that illustrates the steps in order. You can download this performance-based bonus plan template in Excel with this link and start to fill it out!

Company Name:[Your Company Name]
Date of implementation:[Date the plan takes effect]
Objective[Indicate the purpose of the bonus plan. For example: “to motivate and reward employees for excellent performance that helps achieve company goals.”]
The eligibility requirements[Define what employees are eligible for the bonus plan (all employees, specific departments, or roles)]
Performance Metrics[List the specific performance metrics or criteria that will be used to evaluate employee performance.

Ex. Sales goals, customer satisfaction ratings, project completion within deadlines, cost-saving initiatives, safety records]
Bonus CalculationHow will the bonus amount be calculated? You can use a formula or percentage based on the achievement of performance metrics.
Bonus Payout FrequencySpecify when bonuses will be paid out (quarterly, semi-annually, or annually)
Communication Provide details about how employees will be informed about the bonus plan, eligibility, and performance metrics.
Review and EvaluationExplain the procedure for reviewing the bonus plan’s effectiveness, making adjustments, and conducting regular performance assessments.

Performance Bonus: More Examples of Successful Implementation

Airbnb Pays Performance Bonuses for Employees

Airbnb’s employees can invest in the company through stock purchase and equity incentive plans. Furthermore, Airbnb provides performance bonuses and even matches charitable donations, which keeps employees motivated and connected to meaningful causes. As an extra bonus, Airbnb employees also receive discounts at various retailers and restaurants, making life a little more enjoyable.

Zoom Pandemic Employee Stock Bonus

At the start of the pandemic, Zoom award was not in the hope of convincing employees to remain but to reward them for keeping plugged in—bonuses the company gave to employees as a way of thanking them for their commitment. Ultimately, Zoom’s bonus was worth much more than most tech companies’ home office compensation or extra days off.

Keep Track of Your Employees’ Engagement Level With🏆

Overall, performance-based bonuses prove to be beneficial to both employees and companies. They can encourage a high level of performance and instill a sense of recognition in the workplace. As a result, employee retention improves and turnover decreases.

If you decide to implement a performance-based bonus plan in your company, consider trying the multi-tool solution. It’s an innovative employee engagement platform with features like pulse surveys, personalized recommendations, and insightful analytics.

These functionalities are great for employees who wish to share their ideas, concerns, and suggestions. In turn, based on the recommendations of psychology experts, Beams provides employers with detailed employee feedback analysis. In this way, you will always be aware of the health of your teams.

Just book a free demo to explore the possibilities. Get the most out of to gauge your team more efficiently!