Employee bonus schemes

The concept of employee bonus schemes isn't rocket science

First published on Friday, Jun 19, 2020

Last updated on Thursday, Nov 04, 2021

If you offer staff extra pay for performing to a certain level, they’ll feel well rewarded and try harder to reach that level in future.

Employee bonus and reward schemes are valued at many companies. They’ve declined in use since the financial crisis of 2008, but bonuses are still the most popular type of individual performance-related scheme in the UK (CIPD 2015).

But ‘bonus’ is a broad term, which covers several kinds of employee reward and incentive. Which is right for your organisation? If you’re thinking of creating or renewing your employee bonus scheme, here’s what you need to know.

Types of bonus and reward schemes

Discretionary and non-discretionary bonuses

As the name suggests, discretionary bonuses are paid at the discretion of the employer. This means:

  • Bonus entitlement isn’t written into employees’ contracts
  • The standard of performance required to trigger a bonus, and the amount of bonus paid, are flexible
  • For discretionary bonuses to create an incentive, employees must trust they will receive a bonus for good performance

Non-discretionary bonuses are based on defined performance criteria.

  • Bonus entitlement might be written into the employment contract
  • Employees know how well they need to perform to receive their bonus
  • You might be legally obliged to pay bonuses when criteria are met, even if other factors cause a strain on finances

Reward achievement, or influence future behaviour?

Another key difference is that discretionary bonuses often reward success already achieved, while non-discretionary bonuses are often used to incentivise future performance.

Discretionary bonuses are often paid as an annual reward to employees following a successful year. Employees feel rewarded and valued by your organisation.

Non-discretionary bonuses are paid on an agreed schedule, when employees hit a defined target. Employees feel extra motivation to reach the goals you’ve set.

Both types of scheme can help support talent retention and acquisition.

Individual, team and company-wide bonuses

Bonuses don’t have to recognise individual performance.

  • Individual bonuses may be best for incentivising employees to reach individual targets, such as sales targets
  • Team bonuses may be suitable when your workforce is split into teams with defined goals
  • Company-wide bonuses may be most suitable for rewarding strong annual performance. Company-wide bonuses are usually discretionary, since many factors can affect an organisation’s ability to pay.

Cash and non-cash bonuses

While we often think of bonuses as being paid in cash, they don’t have to be. Non-cash options include:

  • Vouchers or pre-paid cards, which can offer good value when purchased in bulk
  • Employee awards that recognise exceptional individual performance and may be accompanied by cash or a voucher
  • Gifts such as electronic devices or luxury items

Which companies use employee bonus and reward schemes?

Individual bonus schemes are most popular at private sector service firms (64% use them) and manufacturing and production companies (55%). In the public and voluntary sectors, less than half of organisations use them on average.

Employers are much more likely to offer bonuses to managers and professionals (53% receive them) than other employees (45%, CIPD 2015).

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