If your business is not currently paying bonuses and wishes to implement a bonus program, you may find that tying the bonus compensation to your net company profit is an excellent way of increasing employee productivity.
Basing bonuses on the net profit of your company also prevents you from having to pay bonuses if your company hits a downturn and does not produce profits. It is up to you, the owner, or your company shareholders to determine how often and how much you will pay for bonuses.
Check for Employee Qualification
Determine which employees qualify for net-profit bonuses. Typically, employees do not qualify for any benefits until they work for at least 90 days. Some companies do not allow bonus eligibility until an employee reaches his first anniversary with the company, and others use performance criteria to determine eligibility. It is really up to you how you determine eligibility criteria but the rules you develop must treat people consistently and not discriminate.
Determine Bonus Pay Rate
Determine the rate of the bonus pay. You can set a flat bonus rate of a percentage of the profits or calculate a sliding bonus scale based on seniority. A seniority plan rewards employees with a higher bonus each year they work for your company. Create a detailed payment formula that can be applied consistently and that everyone can understand.
Choose a Bonus Schedule
Select a bonus schedule. You can decide to pay quarterly, semiannual or annual bonuses. Since you are basing your bonus payments on your net profits, it makes sense to schedule the bonuses around your company's profit statements.
Consider Your Net Profit
Calculate how much of your net profit you will pay in bonuses. For example, if you designate 20% of your profits to your bonus plan and your net profits total $100,000, you are going to pay $20,000 in bonuses. Typically, employers who pay net-profit bonuses based on longevity select a low percentage rate and multiply it by the net profit amount.
Allocate Bonuses Among Employees
Split the total bonus amount among your employees in the manner you decided in Step 2. If you are paying a flat rate to all employees, divide the bonus amount by the number of employees receiving a bonus. For example, if you have 25 eligible employees, divide $20,000 by 25 to determine that each employee is going to receive $800.
If your plan provides different bonus amounts based on longevity with your company, multiply $100,000 by each percentage rate. For example if your senior employees receive a 1% bonus, each of them will receive a $1,000 bonus.
Bonus Compensation Plan Considerations
The federal government does not require employers provide bonus compensation, but if you do, employees can sue you if you do not pay bonuses as described in their contract or handbook. Include any details regarding your bonus compensation plan in your employee handbook. Specify that the company bases the bonus on company profits and, if there are no profits in a bonus period, there will be no bonuses awarded to employees.
- Wagepoint: Giving an Employee Bonus — What You Need to Know [Infographic Included]
- Insperity: Employee Bonus Programs: What’s Right for Your Company?
- Inc: How to Structure Bonuses and Profit Sharing Plans - It Isn't That Hard
- Internal Revenue Service. "Publication 525 (2019), Taxable and Nontaxable Income." Accessed Sept. 4, 2020.
- Include any details regarding your bonus compensation plan in your employee handbook. Specify that the company bases the bonus on company profits and, if there are no profits in a bonus period, there will be no bonuses awarded to employees.
- The federal government does not require employers provide bonus compensation, but if you do, employees can sue you if you do not pay bonuses as described in their contract or handbook.
Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and Graphic Design and a Bachelor of Science in Business Administration from the University of Mississippi.