Bonuses are paid based upon performance.
Bonuses are normally paid in addition to a traditional salary as a tool designed to motivate employees. A bonus can range from a small percentage of an employee's annual income to a significant portion of her annual salary. Knowing that the salaries they pay their employees are tied to performance can be attractive for employers, but can feel like a risk to some employees.
Shared Risk
A compensation system that includes a bonus program works for some employers because they like knowing that employees share in the rise and fall of the company. If an employee does his job well and the company profits, so does the employee. In essence, when a bonus program is involved, the employer and employee share the risks associated with doing business.
Non-Performers
A bonus program is an efficient way to weed out non-performers. After a number of quarters without a bonus, an employee who does not produce loses motivation to stay with the company, making room for a new employee who may bring more production capability to the job.
Supervision
In an effort to ensure that employees who work strictly on salary get their job done, an employer may be tempted to provide more oversight. It is the belief of some businesses that the employee whose partial income is based upon performance-based bonuses has greater self-motivation to get the job done.
Complexity
Bonus programs can work well on behalf of a business and its employees when both parties have a thorough understanding of how it works. Misunderstandings in the bonus structure can create a stressful work situation and lead to the loss of key employees. It is vital that the bonus plan be written out in clear language that is understood by all parties.
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