How to build the right bonus scheme for your employees

Beyond simply paying your employees wages, keeping your team motivated, engaged, and loyal, especially in this tumultuous market is a constant challenge. Enter the employee bonus scheme: a strategic tool to incentivise performance and reward achievement within your workforce.

With a variety of options available, however, choosing and designing the right scheme can be daunting.

This article equips employers, managers, and self-employed business owners with the knowledge to. Whether you’re starting from scratch or looking to revamp an existing, underperforming plan, this guide will help you create a system that motivates your team and delivers a strong return on investment (ROI).

What is an employee bonus scheme?

An employee bonus scheme is a structured program that rewards employees with additional financial or non-financial compensation based on predefined criteria. These criteria can encompass individual performance, team achievements, or company-wide success.

Effective bonus schemes align with your business goals, motivate employees to contribute towards those goals, and ultimately, enhance your bottom line.

6 types of bonus schemes in action

There’s no one-size-fits-all approach. Here’s an overview of different bonus structures, each with its advantages and drawbacks:

1. Discretionary bonus

This bonus pool is at the employer’s discretion and may be awarded based on exceptional performance, exceeding targets, or unforeseen circumstances.

2. Non-discretionary bonus

This bonus is clearly defined in an employment contract or policy, outlining the criteria for earning it.

3. Loyalty bonus

Beyond motivating performance, bonus schemes can also be powerful tools for attracting and retaining top talent. Here are some popular loyalty bonus options:

• Signing bonus: a one-time cash payment offered to new hires upon accepting a job offer. This incentivises candidates to choose your company and can offset relocation costs or other upfront expenses.
• Retention bonus: a financial reward offered to employees who stay with the company for a predetermined period. This encourages long-term commitment and reduces costly employee turnover.
• Referral bonus: a cash reward given to employees who successfully refer qualified candidates who are hired by the company. This leverages your existing workforce to tap into valuable talent networks and fosters a culture of employee advocacy.

Loyalty bonuses, combined with well-designed performance-based schemes, create a comprehensive package that demonstrates your commitment to your employees.

4. Individual, commission-based bonus

This scheme is ideal for roles where individual output directly impacts revenue like sales positions where individual performance can be easily quantified. It can boost individual sales performance, but, some team members might prioritise solo wins over collaborating on complex deals.

5. Team-based bonus (cash/non-cash)

This scheme is most suitable for departments or teams where success relies on collective effort, as it encourages collaboration and fosters a sense of shared responsibility. A customer service call centre could implement a team bonus based on exceeding customer satisfaction targets. The bonus pool is divided equally among team members, regardless of individual call numbers. 

Team-based bonuses can lead to a significant increase in positive customer reviews, but concerns might arise about “free riders” who contribute less than others.

6. Company-wide bonus

This scheme can boost employee morale and foster a sense of ownership, leading to an increase in employee motivation and contribution. A manufacturer, for instance, could implement a profit-sharing scheme where a portion of the company’s annual profits is distributed among all employees. 

However, some employees might feel the payout isn’t directly tied to their individual efforts. This scheme is best used in companies where all employees contribute (directly or indirectly) to profitability.  

7. Cash bonus

This scheme is ideal for recognising outstanding or unexpected contributions and can boost employee morale. A restaurant manager, for example, might offer a lump sum payment to a server who goes above and beyond to resolve a difficult customer situation. However, consistency in awarding bonuses is crucial to avoid feelings of unfairness.

8. Non-cash bonus

This scheme includes non-cash features such as stock options or additional paid time off. It could be anything from private medical or dental insurance to company gift cards or gym memberships.

A startup company, for example, could gift stock options to attract and retain top talent – meaning that all employees receive stock options that vest over time. As the company grows and goes public, employees with vested options could see a significant financial return.

One downside of non-cash bonuses is that you must pay class 1A NICs at 13.8% on the taxable amount (i.e. the value of the benefit in real terms) and have to report to HMRC about this kind of bonus – also known as a ‘benefit in kind’. Non cash bonuses also may not be suitable for all companies, and the value of stock options can fluctuate.

Designing your bonus scheme

Now that you’ve explored some different bonus options, it’s time to craft a scheme that perfectly aligns with your company’s goals and employee needs. Let’s delve into the key steps for designing your ideal bonus programme.

Preparation questions

Before launching a bonus scheme, take time to define your goals. Do you want to:

• Incentivise individual achievement?
• Boost team collaboration?
• Reward company-wide success?
• All of the above?

Structure

Next, you must clearly define the criteria for earning the bonus, including how performance is measured. Here are some key aspects to consider:

• Goals: set SMART goals (Specific, Measurable, Achievable, Relevant, and Time-bound) to ensure clarity and fairness.
• Performance metrics: choose specific metrics that directly align with your goals. For example, if targeting sales growth, use sales figures instead of customer satisfaction ratings.
• Weighting system: if your scheme combines individual, team, and company-wide goals, establish a weighting system to determine the relative importance of each factor in the overall bonus calculation.

Transparency

Make sure that you’re able to communicate the bonus scheme clearly and transparently to all employees to achieve the best results –  and avoid pay disputes later down the line –  and for that, you need to know your new scheme inside out. This includes:

• Eligibility criteria: who is entitled to participate in the scheme?
• Performance metrics: how will performance be measured?
• Bonus calculation: how is the bonus amount determined?
• Payout schedule: when will bonuses be paid?

Legal considerations

Your bonus scheme, as with everything else you do in the course of running a business, should comply with employment laws and regulations. It would be best to consult with an HR professional, financial advisor or legal expert to address concerns like:

• Discrimination: ensure your scheme doesn’t discriminate against specific employee groups.
• Contractual obligations: be clear whether the bonus is discretionary or non-discretionary to avoid contractual disputes.
• Tax implications: understand the tax implications on bonus payments for both the company and employees.

Conclusion

Employee bonus schemes, when designed strategically, fosters a culture of motivation, high performance, and loyalty. By carefully structuring the program and ensuring legal compliance, you can empower and reward your most valuable asset – your employees.

This translates to a more engaged workforce, reduced turnover, and ultimately, a thriving company that benefits from a competitive edge in the market.

For more information, you can check out gov.uk’s expenses and benefits guidelines.