How to set up a bonus system and choose who gets one

A bonus system is a powerful way to motivate employees and reward them for meeting or exceeding ambitious targets.
Employee working towards bonus

Bonus systems can increase productivity and help to retain staff who respond best to financial incentives. For the system to work however, you need to assign bonuses fairly.

Fairness is a critical element of a bonus system. A lack of transparency, logic or consistency around bonuses can ultimately have the opposite effect, making employees less motivated.

Before you implement a system, think about the purpose and structure in advance. What are you hoping to get out of your bonus system? How do you decide who should get a bonus? And how much should the bonus be?

At the end of this article we've also curated a list of other pieces of content you might find interesting and useful.

Choosing a structure for your bonus system

Whether you want to improve an existing bonus system or try one for the first time, the first step is to look at what you want it to achieve.

Here are some reasons for implementing a bonus system:

  • To motivate employees to reach a future target
  • To reward employees for already reaching a target
  • To improve staff retention and reduce hiring costs
  • To recognise and reward staff behaviour that meets your values

Your bonus system should align with your company objectives, however that doesn’t mean it has to be tied to revenue.

Many bonus systems reflect a growing awareness of the broader number of factors that contribute to a company’s success. It might be tied to attendance, morale or how much they've helped colleagues.

A bonus system for individuals, teams or company

Once you decide on your reason for implementing a bonus system, the next step is to decide whether you want to set individual, team or company-wide bonuses.

Individual bonus systems are one of the most common ways to incentivise employees to meet individual targets. Individual bonuses encourage a high-performance culture, where individuals strive to reach their goals and can’t rely on colleagues.

Team bonuses can work well if you want to improve communication and collaboration. This type of bonus tends to work better for small teams, where each person’s contribution is significant. It can be difficult for employees to enact change in bigger teams, which can be frustrating and demotivating.

Company-wide bonuses usually reward an improved financial performance across the company.

Discretionary and non-discretionary bonuses

Deciding whether your bonus scheme should be discretionary or non-discretionary is a crucial part of keeping your bonus system fair.

A discretionary bonus is paid at the discretion of the employer. This means:

  • Bonuses aren’t included in employees’ contracts, so they aren’t contractually entitled to a bonus
  • The employer decides on the amount, performance requirements and timing of the bonus
  • Staff motivation relies on the belief that there will be a bonus for strong work

On the other hand, a non-discretionary bonus is agreed upon ahead of time. This means:

  • An employee’s contract could include a bonus
  • Employees know the requirements they need to meet in order to receive the bonus

If an employee meets their targets and has a non-discretionary bonus in their contract, you could be legally obliged to pay it. It’s essential this type of bonus is only used if you’re certain the company can pay.

Staff loyalty
Case Study.

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Deciding who to reward

Once you’ve looked at the different options for bonus schemes, the next step is to look at which staff members you want to reward.

A lot of businesses will have bonus schemes for their sales team, since there’s a direct link between their work and company revenue. But it’s not the only option. Here are a couple of examples of bonus schemes that you could try.

Improve customer service and satisfaction

Customer service departments are often the unsung heroes of a business. The department has a direct impact on your customer retention rate and the perception of your brand. Yet stress, frustration and a lack of competitive pay mean there’s often a high staff turnover.

Want to change that? Create an annual discretionary bonus scheme that rewards your customer service team for improved service.

There are a number of different ways you could measure performance. You might choose to measure based on speed, giving a bonus if your customer service department could respond to 90% of calls within 20 seconds. Or, you could measure based on how satisfied customers are with the service they’ve received.

Software like Zendesk makes it easy to track customer satisfaction through short feedback surveys. However, you could just as easily set up an automatic email once a customer query has been resolved. To improve your response rate, keep it short. A simple “I’m satisfied” or “I’m unsatisfied” is all the data you need.

Reward employee loyalty

A good employee retention rate is crucial to any business. Hiring is time-consuming, expensive and limits productivity – so how do you encourage employees to hang around?

While there are dozens of factors that contribute to a strong retention rate, a bonus scheme that rewards long-term staff is a great way to demonstrate that you value longevity. It also ensures everyone at the business is ultimately celebrated for the work they do.

Offer a non-discretionary bonus for staff when they meet certain milestones, like a bonus every three or five years that they’ve been with the business.

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Calculating bonuses for employees

The last challenge of setting up a successful bonus system is: how do you work out how much to pay?

There are a number of ways you can calculate bonuses for employees. The route you choose depends on the bonus you’ve set and how straightforward you want your system to be.

The most common options are:

  • A percentage of your employee’s salary (typically between 2.5 and 5 per cent)
  • A set payment (for example, £1,000 at the end of the year)

If you’re creating a bonus scheme for employees in your sales team, some companies will calculate bonuses based on the amount of money they bring into the business.

For example, a sale that creates £5,000 in profit might result in a 10 per cent bonus, whereas £10,000 profit might result in a 20 per cent bonus.

It’s important to make sure that your bonus amount is meaningful and will motivate your staff. Otherwise, you risk losing the incentive of the bonus. For example, an employee earning £21,000 a year will be much more motivated by a £1,000 bonus than a member of the management team on £60,000.

Alternatives from cash bonuses

We typically think of bonuses as extra cash, but there are other options. Vouchers, gift hampers or experience days are all examples of rewards you could include in bonus schemes.

One of the most popular alternatives to cash bonuses is taking employees on a trip.

If you still have a relatively small number of employees, it’s something you can offer to the whole business – for bigger companies, take the team who smashed their goals that year.

While cash bonuses motivate people to a certain extent, you’ll get more value from a two or three-day trip. It gives employees a chance to bond with colleagues and become more engaged with the business. The result? Both staff morale and your retention rate should get a boost.

Creating a bonus system for staff

A bonus system can motivate staff members to reach ambitious goals. It can also reward staff who have already met their targets and encourage people to stay with your business.

Remember that bonus schemes aren’t just for your sales team either. You can create a bonus scheme to inspire any individual or team across the business. Think carefully about whether the same bonus scheme will work across the whole company, or whether a tailored approach to suit individual roles or teams would be more motivating.

What to do next?

We have a wide range of content dedicated to helping you solve crucial business challenges, but here are some suggestions:

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