Ten Facts About Bonuses
- Money required for bonuses comes from profit which belongs to shareholders. It should only be invested in bonuses if it will increase shareholder wealth and/or financial security.
- If bonuses are distributed too widely among employees, the individual bonuses are invariably too small to act as profit motivators.
- Small bonuses for outstanding performers are inadequate rewards that probably act as demotivators, and do not motivate continued high performance.
- Bonuses should be at least 10 percent of an employee’s annual salary, and preferably much higher, if the bonus is expected to motivate continued high performance again next year.
- Bonuses distributed to most employees as the ‘same percentage of annual salaries’ become an entitlement after two years and do not motivate high performance.
- Firms cannot continue to pay out large bonuses unless they generate high profits in most fiscal years.
- Executives, managers and other key employees such as chief engineers, principal designers and business developers have greater impact on a company’s success than employees performing roles at lower organizational levels, so naturally they will be eligible for bonuses, and their bonuses should be larger than many other employees.
- Outstanding performers’ income packages should include a market-related salary, the opportunity to purchase shares in the company, and an outstanding incentive bonus.
- An out-of-date business culture can mask unacceptable productivity levels and dangerous marketing problems, both of which contribute to reduced profit and small or no bonuses.
- Some employees believe that they are already working very hard (input) and should receive a bonus when, in reality their performance level (output) is less than adequate.