What Is a Performance Bonus?

A performance bonus is an incentive provided by employers to employees based on individual, team, or company-wide achievements and contributions.

Performance bonuses can be monetary or non-monetary. Non-monetary bonuses include extra vacation days, professional development opportunities, recognition, or gifts.

Types of performance-based bonuses

Organizations may offer various types of bonuses based on employee performance, depending on their performance evaluation criteria and goals.

Here are some common performance bonus examples:

Individual bonus. Individual performance bonuses are based on the achievements and contributions of a particular employee. These bonuses may include meeting or exceeding personal performance targets.
Team-based bonus. Team-based bonuses are given to several employees or an entire team for collective accomplishments.
Company-wide bonus. Organization-wide bonuses are awarded to all employees when the organization meets or exceeds overall performance targets or financial milestones.
Profit-sharing bonus. Profit-sharing bonuses are tied to the company's profitability, and employees receive a bonus based on a percentage of the organization's profits.
Sales performance bonus. Sales bonuses are common in sales-driven roles. Employees obtain bonuses for achieving or exceeding sales targets.
Spot bonus. Also called task bonuses, milestone bonuses, or project completion bonuses, spot bonuses are often given after completing a task, project, or meeting a goal.
Profit-sharing bonus. Profit-sharing bonuses give employees a percentage of company profits for an outlined period.
Holiday bonus. These seasonal bonuses are often yearly bonuses to show appreciation for their people or celebrate successes.
Annual performance bonus. Annual bonuses reward employees for their contributions and development over a year.
Sign-on bonus. Sign-on bonuses are used to attract new talent and are presented to new hires during onboarding.
Referral bonus. Referral bonuses are used to encourage existing employees to refer qualified candidates for job openings within the organization.
Customer satisfaction bonus. Customer satisfaction bonuses are given to employees who are responsible for high levels of customer satisfaction and are often seen in customer service or client-facing roles.
Innovation bonus. Innovation bonuses are given for introducing innovative ideas or solutions that positively impact the organization.
Mission bonuses. Mission-related bonuses acknowledge employees based on showmanship of company culture and vision.
Safety bonus. Safety bonuses are granted when employees maintain a safe work environment and achieve safety goals. These are common in industries where workplace safety is a priority.
Attendance bonus. Attendance bonuses are awarded for consistent presence or meeting specific attendance targets.
Retention bonus. Also called longevity bonuses, retention bonuses are provided to employees who stay with the company for a specified period.

Benefits of providing performance pay

Performance bonuses can motivate employees, recognize outstanding accomplishments, attract and retain valuable talent, and even align individual efforts with organizational objectives.

Employee motivation and engagement

Performance bonuses encourage employees by linking financial perks to individual or team achievements. This ultimately fosters engagement, commitment, and drive for excellence. When employees see that their efforts are directly tied to monetary gains, they feel acknowledged for their contributions, leading to increased engagement.

Goal alignment

Performance bonuses are often structured to align individual and team goals with the company's broader objectives. By linking financial incentives to key performance indicators, for example, companies can create a results-driven culture where employees understand how their work impacts the company's overall performance.

Keeping up with the competition

Companies with a reputation for being generous with awards and acknowledging employees for a job well done are likely to stay competitive in a saturated hiring market.

Talent acquisition and retention

Incentives can also be a part of an organization's talent acquisition and retention strategy. Competitive bonus structures can attract top-tier candidates during the recruitment process—while also inspiring current employees to stay and succeed in their roles.

How to implement a performance bonus policy

Implementing a performance bonus program at a company involves careful planning and communication to ensure its effectiveness.

Here are five steps to guide the process:

Define clear criteria. The HR team defines objectives for the performance bonus program, involving employees in goal-setting when applicable. Set measurable and realistic performance criteria aligned with company goals, ensuring equitable bonus pay for all employees.
Train leadership. Train management to communicate performance bonus criteria and motivate employees to achieve these goals.
Communicate transparently. Communicate the program details, eligibility criteria, measured metrics, eligibility, bonus calculation, and bonus pay periods.
Set a budget. Determine the funding available for the performance bonus program. Consider the financial health of the company and allocate resources accordingly.
Monitor and evaluate the program. Regularly assess the effectiveness of the performance bonus program through KPI reviews, employee feedback, and organizational performance evaluations. Identify areas for improvement if needed.

Performance bonus FAQs

How much should a performance bonus be?

On average, performance bonuses for non-executive leadership roles are 1% to 5% of an employee's annual salary. However, the exact amount varies based on individual company policies and compensation plans.

How do I calculate a performance bonus?

Figuring out how much to award your employees varies greatly on the type of bonus and your performance pay structure.

Here are four examples of how employers might calculate employee bonuses:

Sales commission. Multiply the commission percentage by the total sales. To determine a fair rate, consider factors such as the employee's sales involvement, the value of their role, and the product price.
Percent of salary. For full-time employees, calculate bonuses by multiplying the year-end bonus percentage by their annual salary.
Lump sum. Offer a complete award all at once. For example, a sign-on bonus may be awarded in one single payment. Lump sums can be the same throughout a company or vary by role type.
Installments. Divide a total award amount into equal or nearly equal portions and pay it over a specified period of time. For example, a company might choose to pay a year-end performance bonus in quarterly installments throughout the following year.

Is performance-based pay taxable income?

Generally, yes. Performance pay is typically considered taxable income in many jurisdictions, including the U.S. When employees receive bonuses, commissions, or other forms of performance-based compensation, these earnings are typically subject to income tax. The IRS considers bonuses "supplemental income."

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2023 Velocity Global, LLC. All rights reserved.