Types of bonus programs for rewarding employees

Learn how to get your small-business incentive plan right. Implement some of these common reward systems for employees to increase motivation through recognition and other incentives. 

Employees at work celebrating and giving each other a high five at a meeting.

Why have a reward system for employees?

There are all sorts of reasons that you, as a small-business owner, would want to give your team bonuses. Bonuses motivate people, and rewarding people for a job well done fosters the kind of culture you want in your business. It also helps you attract and retain top talent.

So yes, in theory, employee bonuses are a great idea. But here’s the deal: Bonuses must be done right if they are to generate the intended result (i.e., motiving staff to excel while simultaneously rewarding them for a job well done).

The downside of workplace bonuses

Be aware that bonuses can fail to have their desired effect.

  • First, employees can get used to bonuses, in which case the bonus will cease to motivate.
  • Second, if an employee fails to earn a desired bonus—either because the goal was unrealistic or because the employee was not up to the task, the bonus becomes, not a boon, but a bone of contention.
  • Third, if you get too stingy with bonuses, you could face a revolt.

Company bonus plan overview

Bonuses are frequently called incentive plans and, as a best practice, having a scheduled and predictable incentive plan is smart.

The purposes of having an attainable bonus structure are many: The main reason, of course, is to motivate people to excel, but of equal importance is to reward them for doing so. Additionally, a good bonus plan can be a recruiting tool.

There are three key elements of a good reward system for employees:

1. It needs to be easy to understand. This works both ways; not only do staff members need to understand what it takes to get the bonus (and why), but so does management.

2. It needs to be fair. Your bonus plan must make sense for everyone. For instance, it would be wrong to create a bonus for sales growth and have that apply equally to your accounting department.

3. It needs to be real. The money or other rewards that people get cannot be in lieu of what they normally would receive; that is, the bonus must really be a bonus.

Two men talking at their cubicles at work.

Types of workplace bonus plans

Your bonus plan is contingent on the type of business you have and the reasoning behind the bonuses. Here are your options:

Annual bonuses

Think of your typical holiday bonus. This type of bonus is great because, yes, it applies across the board, and, yes, people love getting extra money for no real reason other than a good culture. People want to feel appreciated.

Performance bonuses

The idea here, of course, is that the potential bonus is an attempt to motivate people to reach predetermined goals. The imperative is 1) that everyone is clear on the goal, 2) that the goal is achievable, and 3) that the bonus really is an extra reward. If those three criteria are met, your bonus plan should be a great incentive.

Milestone bonuses

These bonuses are offered when specific work goals are reached, be it getting a project done on time (or early) or making a predetermined number of sales calls in a month.

Occasional bonuses

A manager might announce one day that the high salesperson of the day will get $100 cash. Or the owner might give everyone a $20 gift card. Either way, the unexpected bonus is always a welcome treat.

Nonmonetary bonuses

The reward need not involve money to be considered valuable. You could consider, for example, "employee of the month" recognition, preferred parking spots for a month, or shout-outs in the company newsletter.

Common bonus structures

For performance-type bonuses, be sure that the milestones are ones that will help you get your business where you want it to go, and ones that are reachable for the employees in question. Be sure to put the plan in writing and communicate it effectively with your team.

On that last point, staff members need to understand the thinking behind the bonus structure (how it is a win-win for both the business and the staff and how to accomplish the goal in question). Incentive plans can be done individually, per team or department, or companywide. It depends on the form of bonus and the goal. The good news is that a great bonus plan is indeed a bonus for everyone—your team, your business, and yourself.

Related Articles 

Want to learn more about supplementing your employees’ benefits?

A New York Life financial professional can help determine what’s right for you. 

This article is provided for informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.