July 11, 2012

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In some industries, bonuses are a common and expected part of compensation packages. In banking, consulting and professional services, for example, you may need a bonus program just to stay competitive for top talent. In others, such as manufacturing and hospitality, bonuses are not necessarily expected — but they’re always appreciated.

A Key Differentiator

If bonus programs aren’t typical in your industry, you can differentiate your company and offer an attractive employee perk by implementing one. If you’re thinking about creating a new bonus program or reengineering your existing one, ask yourself these two questions first:

1. What’s your goal? There’s no question that money is a motivator. It might not be the only motivator — or even the most effective one in the long term — but there’s no doubt it can get people moving in a certain direction.

If you want to start a sales blitz, improve customer service or undertake a similarly measurable, short-term project, a monetary bonus can be quite motivating. If you’re interested in tying performance to pay, a bonus may be the right way to go.

2. What’s the right type? Bonuses come in all shapes and sizes, so you need to figure out what might work for your employee mix.

Some companies have had great success with small one-time bonuses that are given on the spur of the moment as recognition for doing something good. For example, a supervisor might give an employee who has shown exemplary teamwork or customer service a $20, $50 or $100 bill. Or coworkers can be given cash that they must “pay forward” to other co-workers to recognize their cooperation, creativity or other admirable quality.

Among the most common bonuses are year-end bonuses. These are especially popular in professional service firms. They typically represent a share of company profits in recognition for the business having a good year.

Performance bonuses are particularly effective for managers and other leaders who are responsible for the performance of a team or unit. Often, these types of bonuses are calculated as a percentage of incremental performance gains — higher sales, improved productivity, more accident-free days, or similar measures.

If you’re looking to hire the best new employees, signing bonuses are a great way to attract talent in a competitive marketplace. They can be given to the new employee or to a current employee who referred him or her — or both. For high-demand jobs, a bonus can make the difference between a prospect choosing you or your competitor.

Retention bonuses help motivate employees to stay with you. In the short term, a cash bonus might keep someone from leaving. But in the long term, a promotion, new responsibilities or a permanent salary increase may be required to keep an ambitious employee satisfied.

Other Motivations Beyond Cash

Of course, not everyone is motivated by cash. Some employees are motivated by more time off to spend with family, while others are motivated by a promotion, new title and responsibility, or donations to their favorite charities.

Be creative with your incentives, both cash and otherwise. And remember that the payment of some bonuses may have significant tax consequences.

We can advise you on the tax and other implications of offering employee bonuses. Contact us for more details.

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