The end of the year means several things for businesses. As a leader, you may be looking to award employees with a year-end bonus—compensation above an employee's specified base salary. Towards the end of the calendar year, many companies must determine whether or not to give out bonuses. To help you determine if bonuses are right for your business, here's the breakdown of when to give a year-end bonus and how much to give.
Companies often give a year-end bonus to all employees at the end of the calendar year (around the holidays). Today, an annual year-end bonus is not a guaranteed offering in all businesses, and often, they are based on merit or performance. Since the holidays are a frenzied and high-spending time for many employees year-end bonuses can be powerful and appreciated form of additional compensation. But as a manager, you have a few things to consider before doling out incentives.
Why Give Out a Year-End Bonus?
No one will ever complain about receiving a year-end bonus. This can be a way for your company to say thank you to your employees or your team. A holiday bonus can also increase employee productivity, loyalty, motivation, and even improve morale. For sales organizations, bonuses are sometimes built in to the team's pay mix instead of commissions (learn more about bonus vs. commission pay).
To be more cost-effective, many companies tie the amount of the bonus to performance. This is a great way for employees to take on initiatives and set goals outside of their day-to-day job description. Employees are then encouraged to collaborate and share ideas, in addition to high performance in their role.
Most importantly, if you decide to award bonuses on performance, it is critical to clearly define the conditions to qualify for a bonus. This sets clear expectations for employees and helps keep morale up.
Types of Year-End Bonuses
There's no right or wrong amount to pay employees. However, there are several types of bonuses you can give and many different ways to determine who earns a bonus. You may even award different types of bonuses to different teams, depending on their responsibilities. For example, if your reps earn commission, you may decide they are not eligible for bonuses. Regardless, the right bonus structure depends on your organization and culture.
Based on Company Earnings
In general, companies are more willing and able to give year-end bonuses when sales are high and the revenue stream is strong. So, the value may change on a yearly basis. This encourage the entire company to work hard towards goals collaboratively. It can improve company morale as well by creating a win together mentality. When everyone does their part well, everyone reaps the benefits.
Based on Individual Performance or Goals
Bonuses are a good way to encourage employees to take on initiatives and collaborate outside their role. By setting quarterly or yearly goals, each employee has specific guidelines to earn their bonus. This type of bonus motivates employees to increase performance because they can see their individual impact on the company's success.
The bonus amount can be a set dollar amount or a percentage of the employee's total pay. Traditionally, bonuses are all or nothing. However, you can allow employees to earn part of their bonus with multiple goals that are ranked as "completed," "incomplete," or "X% completed."
A year-end bonus doesn't necessarily have to be a cash bonus. The true purpose of a year-end bonus is to give credit where it's due and boost employee morale. There are several non-financial rewards that can also act as a bonus, such as a team outing, party, or dinner. Often these work best as a team bonus, but something such as sporting event tickets or a weekend getaway can work well for individual bonuses. For example, you might consider awarding an annual presidential award to a few select non-sales employees with the prize being a trip to President's Club with the sales team.
A year-end bonuses is a great way to reward employees for a year of hard work. The best part is they are flexible incentives that can be tailored to your company's abilities and culture. They work well as a year-end reward but also as a spontaneous incentive for a job well done. Either way, the motivate and encourage employees to increase performance and keep morale high.
Learn about other ways to incentivize employees in our "Ultimate Guide to Sales Compensation Planning."