Education News

What Are the Different Types of Bonuses?

Bonus is a reward that is paid to an employee for his good work towards the organization. It is in addition to his monthly salary and is generally paid annually. Nowadays, it is mentioned in the annual package or CTC (Cost to company) negotiated with the employee at the time of giving him an offer.

There are two types of bonus:

1. Compulsory Bonus: Originally, the basic objective to give bonus was to share the profit earned by the organization amongst the employees. But gradually, it has become a matter of right and so sometimes it is also an issue of contention between the business leaders and the labor unions. Hence, some rules are implemented to clarify the bonus payment. The laws governing the bonus payment specify to which type of establishments, bonus payment will be applicable and to which size of establishments it is applied. Bonus is applicable to companies with some minimum number of employees. This number is different for factories and for other businesses.

There is also a monthly salary limit to which bonus is applicable. It specifies when the bonus is payable. The components of a salary (e.g. Basic, Dearness allowance etc.) which are considered for calculating bonus are clarified. The minimum and maximum percentage limits of bonus are also specified. The rules have some exemptions for the first few years to newly established businesses. There is some penalty for non-compliance of the rules. Periodically, some changes are made in the rules. The HR department must check the latest provisions of the rules regarding bonus and guide the business leaders in complying with the same. The business leaders must ensure that their company follows the rules and performs its commitments as specified in the law. Remember, the law is made to provide some assured benefits to the employees, and to regulate deviances on the part of the business leaders. But, bonus must be given in good spirit.

2. Voluntary Bonus: There are three types of voluntary bonus:

  1. Performance Bonus

  2. Joining Bonus or Signing Bonus

  3. Discretionary Bonus

Performance Bonus: Some companies give a bonus as per the performance of the employee. They structure the overall annual compensation given to the employee in such a way that the employees get a significant part of their package in the form of such performance bonus. The performance in question may be the employee’s own performance or the group or the overall company performance. Such a bonus acts as a motivation to the employees to perform better.

Joining Bonus or Signing Bonus: Joining or signing bonus is an amount paid to a new employee by a company as an incentive to join that company. This is often given as a way of making a compensation package more attractive to the employee. Here are some reasons for giving a joining bonus: In some industries, where talent is scarce, companies pay the new employees a joining bonus to attract them to join or join sooner. The main reason for offering a joining bonus is to ensure that the company gets the right talent at the right time. If the employee is relocating from another city or country, companies give a joining bonus to help the employee cover his relocation expenses. Sometimes, it is given to compensate for the amount the employee has to pay to his current company for leaving before the minimum notice period. Also, the employee may have to lose some benefits (e.g. pending incentives payout, bonus or other such payments) from his current company if he joins our company now.

We may offer a joining bonus to cover such losses to him. When a company tries to pick up an employee working with a competitor, they may lure him with a joining bonus to convince him to leave that company. When a new employee demands a higher salary which he is getting in his current job and we can’t match that salary because our internal salary bands are lower, we can offer to compensate for the difference through some mechanism like a joining bonus, so that we don’t disturb the salary levels at our own company and at the same time, we compensate the new employee financially as per his expectation. Finally, a joining bonus is a mutual give-and-take arrangement when the employee is important to the company and the company is ready to compensate for filling that position urgently.

Discretionary Bonus: To recognize some exemplary achievement by an employee or a group, some companies announce special, one-time bonus. The reason for such a discretionary bonus could be something like: Exceptional performance Completion of a significant project Implementing a new idea or development of an innovative process Excellent customer services Helping the company win an award or a big order Some other action which helped the company’s business in a positive way This is a good motivation to those who get it to continue doing good work. It also inspires others to strive harder. It sends good signals to the employees that the company recognizes and appreciates good work.

The LSBF is one of the well-renowned sources to know more about different kinds of bonuses.

Leave a Reply

Your email address will not be published. Required fields are marked *