We often hand out year-end bonus payments to our employees. This is to compensate for hard work and effort above and beyond the norm. To do this fairly and efficiently, you should take a little time to set up a system for deciding whom to compensate and for how much. That way you can make year-end bonus payments with ease and not turn the end of the year into a head-scratching puzzle. The key to doing this is to set up performance targets.
In general, you want to provide incentive pay (pay for performance) for specific reasons and not just for working normal hours. If you had a great year and want to share the bounty with your employees you can give everyone a bonus, but that is not incentive pay. Well-designed performance targets let your employees know what they are being rewarded for. As such, they tend to improve employee performance.
In this regard, it is important to understand the difference between structured incentives like performance targets and casual incentives for which the employee does not know when a bonus might or might not be received or why. This type of year-end bonus is less effective in improving the performance of your employees.
The occasional "pat on the back" of an occasional cash bonus can be a day-brightener for your workers. But, when it is coupled with the attainment of a goal, extra effort, longer working hours, and the like, it is more effective in driving continued good performance. Such casual incentives can be at any time throughout the year and are best timed to occur right after the performance that you want to reward. When handing out these occasional bonuses, you should make it clear just why it is that you are doing this and that the bonus is a measure of your gratitude for work above and beyond the "call of duty."
The downsides of casual incentives are that employees who do not receive bonuses may be envious or claim that their supervisor is playing favorites. To the extent that you make it clear why the bonuses are being given, you can reduce this sort of issue.
Here we are talking about performance targets either at the end of the year or at fixed points throughout the year. When setting up this approach to bonuses, think about what it is that you want to achieve. If you want to improve employee retention over the years, you may wish to tie year-end bonuses to performance but also provide an increase in benefits that is permanent so that the employee is building their benefits every year by staying on.
These come in various types. There are piece rate systems in which you reimburse an employee based on output. But, when the employee has a flat salary, you can give bonuses at the end of the year to recognize their value to your company. And, the size of the bonus will be directly tied to their measured value. When you use merit pay, however, you are increasing their base pay rate to a level that will continue into the next year. It is wise to think this through clearly before giving out merit pay increases instead of generous bonuses as it ties you into an expense that will only increase from year to year and cannot be reduced if performance drops.
The take-home lesson is that you need to set up a system that lets you make year-end bonus payments with ease and the assurance that your system is benefiting both your workers and your company.
When setting up a year-end bonus plan, you will want to be sure you have enough money to do this. Be certain to set up quantifiable targets for receiving bonus payments. Setting up levels of achievement lets you pay more for better performance. And, always put your plan in writing. If you have never done this before, ask us for help at Exigo Business Solutions. We can help you set up the criteria, develop custom reports in QuickBooks that do the calculations for you, and let you do year-end bonus payments with ease. The basics of a good performance bonus program are to reward solid results, recognize effort, and leave room for improvement the following year.
This is a question to consider if you are planning a bonus system. The better the job you do in setting up your bonus system the more likely it will be that the system drives improvements in performance. Three-fourths of established companies offer some sort of year-end bonus payment. The consensus of managers is that they get higher morale and better employee retention by given bonuses, provided that the system is well-designed. While cash bonuses are always welcome, other rewards like free hotel lodging on the weekend of an office holiday party or a paid-for trip to a continuing education class in a distant city may be appreciated more appreciated and likely to result in better performance and employee retention.
If you want to go it alone in setting up a year-end bonus plan, start by looking at your budget. Decide how much you can afford to pay out. Then decide what activities and accomplishments you want to reward. Once you have those things figured out, set up a system for evaluating for bonuses, setting up payment, and integrating year-end bonus payments with your normal payroll.
When all is in order, let your employees know about your bonus system and how it will work. Provide a clear explanation of the goals and targets that you will use and that employees can strive for.
Assign someone (or yourself) to do the appropriate evaluations. Set up a schedule. Perform the evaluations and enter your info into your bookkeeping system. Then, generate the bonuses.
Year-end bonuses are subject to the same tax treatment as the rest of your payroll. Thus, bonuses will be subject to withholding of 6.2% for Social Security tax and 1.45% for Medicare tax. In addition, Federal, State and Local taxes will need to be dealt with.
The IRS has two options for withholding from your year-end bonus. One is to simply add the amount to the last paycheck of the year and withhold accordingly. The other is to withhold 22% (up to $1,000,000 and 37% for anything above that).
For help setting up a year-end plan that dispenses bonus payments with ease, talk to us about using QuickBooks to handle your bookkeeping and make the whole process easier. For assistance with running your bonus system or for asking us about providing outsourced bookkeeping services, contact us at Exigo Business Solutions in the Kansas City area.