What Is a Performance Bonus? Benefits, Types and Components

By Indeed Editorial Team

Updated 11 December 2022

Published 8 November 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Professionals who outperform their peers in terms of output may be eligible for performance incentives. Organisations often leverage these bonuses as motivating incentives to increase the quality and productivity of their staff. If you're interested in implementing a performance bonus policy at your firm or would like to acquire a better knowledge of these policies, reviewing the different types and components of performance incentives might be beneficial. In this article, we provide a definition of a performance bonus, describe its benefits, explore the different types and components of performance bonuses and explain how to administer them effectively.

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What is a performance bonus?

To answer the question 'what is a performance bonus', performance bonuses are monetary awards professionals can receive in addition to their regular pay or salary for reaching or surpassing specific performance goals. Companies can use these bonuses to reward professionals who exhibit outstanding work habits or celebrate and thank the staff who achieve certain goals. Organisations usually predetermine the objectives and award them at a specific time.

For instance, an organisation may give out a quarterly incentive if sales increase by a particular amount. While a professional can negotiate a performance bonus, companies usually give these incentives only when they can afford it. Listed below are the benefits of giving out performance bonuses:

  • enhances staff morale and focus

  • boosts productivity and efficiency

  • improves the bond between the organisation and its staff

  • helps to reach organisational goals

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Types of performance bonuses

Below we describe the types of performance bonuses:

Commission bonus

Sales-related jobs are the most likely to offer commission incentives. Organisations use commission incentives to reward professionals who outperform their peers by sharing a percentage of the earnings from a sale. You can calculate commission bonuses by multiplying the final sale price by your commission percentage. For instance, if a property salesperson convinces a consumer to purchase a $1,000,000 property and their commission rate is 1%, the salesperson may get a $10,000 commission from the transaction.

Related: What Is Commission Pay and How Does It Work? (With Types)

Spot bonus

A spot bonus is an unexpected performance incentive that organisations frequently provide to staff immediately following a successful project. Managers usually pay out these incentives from a discretionary fund that they control. Spot bonuses can be a minor increase to a professional's salary or another kind of remuneration, such as a gift card.

While some businesses may enable managers to issue spot bonuses whenever they see fit, others may want managers to utilise spot incentives at specific periods. Professionals who volunteer to cover for a colleague or work an extra shift, for instance, may be eligible for a spot bonus. Alternatively, if the organisation likes its managers to provide spot incentives during specified periods, managers may grant spot bonuses to staff who remain helpful and productive throughout a busy work season.

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Profit-sharing bonus

Organisations may give out profit-sharing incentives to staff when the company earns a higher-than-expected profit. Though corporations frequently provide profit-sharing incentives at the end of the year, professionals may also earn these bonuses by assisting the company in exceeding its goals throughout the year. For instance, if a boutique sets a target of selling a particular number of pieces from a specific designer and the sales professionals assist in exceeding that goal, the boutique may opt to split a percentage of the earnings with its staff.

Mission bonus

A mission bonus is a type of performance-based reward that professionals might get after meeting a specified goal. Managers might establish the same standard objective for all staff or create goals for each professional separately depending on their skill level or job expectations. Mission incentives sometimes include deadlines for professionals to accomplish their objectives. An advertising firm, for instance, may give a mission bonus to every visual artist who generates a specific number of logos before the end of the week.

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Gain-sharing bonus

Gain-sharing bonuses are particularly prevalent in the manufacturing industry. Organisations give out these incentives to staff who help enhance the quality or quantity of the factory's output. Professionals are more likely to get these performance-based bonuses during high-demand seasons for the product they make. For instance, a firm that assembles Lunar New Year decorations may pay its staff members a gain-sharing incentive if they create more decorations than planned from December through February.

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Elements of a performance bonus policy

Organisations frequently utilise performance incentive plans to explain their practices to professionals while also meeting regulatory needs. A clear performance bonus policy ensures that the firm is accountable for awarding bonuses when they're due and promotes fairness in the award process. A performance bonus policy often includes the following elements:

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Policy summary

The policy summary explains the company's performance bonus programme and offers an overview of it. This part, often known as the policy brief, outlines the organisation's purpose of giving out bonuses. It clarifies the process of selecting which staff to reward and how to calculate the exact bonus amounts.

Scope and eligibility

This portion of a company's performance bonus policy specifies which staff is eligible for bonuses. In some circumstances, an organisation may only provide incentives to full-time and part-time staff, but not to contract staff, seasonal staff, interns and temporary staff with contracts of less than one year. The eligibility conditions, often known as the policy's scope, establish when a professional is eligible for a bonus and identify discretionary and nondiscretionary incentives.

The organisation solely determines the existence and amount of discretionary incentives. Organisations cannot guarantee that any staff would receive discretionary bonuses. For instance, an organisation may offer a bonus to a staff who demonstrated exceptional performance during a specific period. Non-discretionary incentives serve as a guaranteed and publicised form of incentives to those who fulfil the bonus requirements. For instance, organisations may pledge to provide non-discretionary incentives to teams who accomplish certain goals.

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Bonus formats

Organisations employ the component parts of a performance bonus policy to identify and describe each kind of incentive they provide. Organisations typically give incentives in the following ways:

Incentive bonus

Organisations pay these bonuses at different periods and generally have different payment dates depending on the bonus. Professionals receive incentives for outstanding performance or for reaching a specific objective. Organisations usually leverage incentive bonuses to motivate staff to attain annual organisational financial goals or to surpass individual and team targets.

Lump-sum bonus

Organisations often award lump-sum incentives to one professional at a time to recognise exceptional work performance. Exemplary work performance may entail surpassing financial or nonfinancial goals, completing additional tasks and demonstrating a good model behaviour to other staff. Usually, managers or supervisors may submit a formal written recommendation to the human resources department if they believe one of their team members deserves a bonus for showing exemplary performance. These are usually one-time incentives.

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Year-end bonus

Most professionals are eligible for a year-end bonus. Usually, the conditions entail the organisation fulfilling its annual financial goals and the board of directors approving the bonus payout. Organisations generally provide this incentive at the end of the year to recognise staff for their hard work and devotion. While most staff are eligible for this incentive, year-end bonuses sometimes include eligibility restrictions based on how long the person has been with the firm.

Related: What Is a Year-End Bonus? With Frequently Asked Questions

Tips for earning a bonus at work

You may consider the following tips to enhance your likelihood of receiving a bonus:

Enhance your productivity

Improving your productivity and efficiency is one method to enhance your chances of receiving a bonus. You may find strategies and techniques that can help you concentrate and perform better at work, such as time-blocking your day or waking up earlier. Improved productivity can result in higher-quality work, which can substantially enhance your chances of getting a bonus.

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Establish objectives for yourself

Setting objectives can help you recognise the actions you are to take to satisfy the criteria for a bonus. This allows you to concentrate on the tasks that you've got to complete to receive a bonus. It may also inspire you to outperform yourself and your previous results.

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Be proactive

Being proactive and taking pre-emptive initiatives are usually positive traits. It communicates to your management that you have a sense of ownership over your job and that you're capable of leading yourself successfully. You can begin to take more initiative both within and outside of your job area.

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Engage your supervisor

You may openly and directly talk with your supervisor and boss about the conditions for receiving a bonus and plan the measures you could take to qualify. Speaking with your boss can also help you discover areas where you lack and how you can improve. Being upfront about what you expect renders future discussions about your performance and remuneration simpler.

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