Bonus Considerations

“As we come to the end of the year, I’m considering bonuses for my employees. Has anything changed I need to know?”

Your HR Survival Tip

Employees typically love to receive cash bonuses at any time. However, as a business, you need to consider whether you are taking full advantage of this particular benefit so your business benefits, too.

The laws have become very picky about non-discretionary bonuses. A non-discretionary bonus is one that is expected and, often, the amount the employee might get is also known based on certain criteria. Many companies have had their bonus plan in place for so long it would likely be considered non-discretionary for legal purposes. Non-discretionary bonuses must now calculate an overtime amount based on any overtime worked by hourly employees over the bonus period. Yes, it’s another strange calculation California requires so let us know if you need help with it.

If you want a discretionary bonus plan, employees should haven’t any expectation of a bonus, should wonder if there will even be one, wonder when it might be, and have no clue about how much they might receive. Does your bonus plan fit this? If not, it could be considered non-discretionary. A true discretionary plan is basically a total surprise to the employee.

The biggest problem with a discretionary bonus is the inability to create a plan. Aside from the legal label of your bonus plan, have you given any thought as to why you’re providing a bonus? If you’re just trying to share the wealth and provide employees with a bonus when it’s been a good year, perhaps a profit-sharing plan would be better.

If you do want a more formal bonus plan (non-discretionary), make sure you’ve set it up so employees realize they actually have to earn it. Have quarterly goals set for the company, the department, and the employee. Consider the payout date if you’re doing an annual bonus and whether or not the employee must still be employed by you on the payout date. Also, what happens to those employees who haven’t worked the full year? Overall, you shouldn’t be providing a bonus if the company doesn’t meet certain revenue expectations or certain goals aren’t met. Bonuses are a reward for helping the company succeed. An employee shouldn’t be earning a bonus if they haven’t met their goals or aren’t doing a good job. Remember a bonus will appear as a big gold star on the employee’s file and will work against you if you want to terminate them for poor performance a month or two later.

Use bonuses to make sure your company is moving forward. Rather than throw money at employees, make them work for it. Both the company and the employees will come out ahead if you do.