The different types of bonus schemes and when to use them

Non-Discretionary and Discretionary Bonus Schemes

By and large, bonus schemes will fall into two brackets. Non-discretionary, where bonuses are based on a defined performance criterion with the entitlement likely to be written into the employment contract, and discretionary, where bonuses are paid at the discretion of the employer with no pre-defined criteria or contractual obligation.

Non-discretionary bonuses are likely to be offered to sales departments that work on commission. This means that, for example, a salesperson will have a defined performance criterion, such as hitting a sales target, in order to trigger a bonus payment. As the employee knows how they need to perform to receive the bonus, this acts as an incentive to meet their target.

However, from the business point of view, it is important to note that – depending on the written agreement – this may mean that you are legally obligated to pay the bonus regardless of the company’s overall financial position. Therefore, if the business’ finances are already under strain, the agreed bonus must still be honoured.

In the case of discretionary bonuses, there is much more of a grey area as such entitlements will not be written into an employment contract and nor is there concrete criteria for which the bonus is triggered. This effectively means that the power is with the business to pick and choose when and how to offer such bonuses, but employees must trust they will receive a bonus for good performance. If staff fail to see the business follow through on such promises, the attractiveness of the incentive begins to fade away and employees’ motivation and productivity is likely to dwindle.

Monetary and Non-Monetary Bonuses

The great debate as to whether businesses have to offer monetary carrots to motivate employees has gone on for years. When we think of a bonus, your initial thoughts naturally turn to money, but there are other incentives that managers can offer.

These alternative incentives may include flexible working patterns (such as working from home, swapping shifts or altering working hours etc.), finishing early, extra holiday, vouchers or other gifts. The criteria that must be met to qualify for such bonuses comes down to the management team, who should seek feedback from their staff as to what incentives would be most likely to motivate them should they not wish to offer monetary rewards.

Smaller businesses are most likely to offer non-monetary incentives such as finishing early or earning extra holiday, as they simply do not have the financial flexibility to offer monetary bonuses. This is likely to be on a non-discretionary basis and should always be kept in review; otherwise, employees may feel as though their employer does not value them.

It is expected that the one thing employees seek is money as, after all, that is why they show up for work. No one should be chastised for being frank about preferring money to non-monetary offerings, but neither does that mean that non-monetary types of bonus schemes cannot incentivise your staff.

Individual and Collective Bonuses

Bonuses can be offered on either an individual or collective basis. If the goal of the bonus scheme is to recognise the achievement of a single member of staff, then an individual bonus is most fitting. Should you wish to recognise the efforts of a team, department or the entire company, then a collective bonus should be offered with a standardised reward given to all individuals that qualify.

While rewarding achievement is good, influencing future behaviour is the main goal of employers offering bonus schemes in the workplace. The incentive to work hard and meet targets in return for a bonus that the employee trusts they will receive (unless it is non-discretionary, and the company is therefore obliged to honour the agreed bonus) makes for a motivated workforce.

All businesses rely on their staff to work as a team, which is why offering team and company-wide bonuses that are reliant on the success of every member of the group work well to ensure that everyone is on the same page. If the workforce is split into different teams, setting defined targets will encourage teamwork which, ultimately, benefits the business. Company-wide bonuses are usually based on a strong annual performance and are given on a discretionary basis with many factors to consider that could affect the company’s ability to pay.