What is a performance-based bonus?

A performance-based bonus is an extra compensation granted to a team member as a reward for reaching pre-established goals and benchmarks.

Leadership often rewards their teams with performance bonuses after evaluating outstanding projects or high-quality work performances. 

Types and examples of performance bonuses

Every organization creates and follows their own policy to reward exceptional work. The most common types of performance bonuses include:

• Spot bonuses. A spot bonus is an “on the spot” decision, a form of compensation awarded in recognition of high performance. Managers often draw spot bonuses from a discretionary fund and leadership may set designated times for spot bonuses. 
• Commission bonuses. Commonly utilized by sales departments, commission bonuses are a predetermined percentage of sales profit, usually awarded to a team member in recognition for their role in securing a sale. 
• Mission bonus. This is compensation awarded to team members after the achievement of specific, predetermined goals. These goals can be standardized for the whole team or personalized for each individual, based on their skill set and job responsibilities.
• Profit-sharing bonus. If an organization turns a higher profit than expected, they may reward people who exceeded performance expectations with profit-sharing bonuses.
• Gain-sharing bonus. Gain-sharing bonuses are commonly awarded in the manufacturing sector. Usually given during seasons where their products are in high demand, gain-sharing bonuses are paid to the people who help improve efficiency and quality of production.

Why should HR leaders care about performance bonuses? 

A well-designed performance bonus system based on fair criteria can stimulate team members to deliver quality work, reach set targets, and maintain motivation and productivity.

Performance bonuses can also help HR leadership to: 

• Keep team members engaged in–and excited about–the company’s longevity 
• Retain top performers and drive company loyalty 
• Attract new talent towards the organization 
• Motivate people to achieve their potential

Performance bonuses: advantages vs disadvantages

While performance bonuses are a great way to motivate your workforce and incentivize exceptional performance, they’re not without challenges. If an organization has no clear strategy in place to monitor the frequency, scope, and recipients of performance bonuses, both their bottom line and company culture can be affected. 

Let’s consider both the strengths and challenges associated with performance bonuses.

Pros	Cons
Motivates the workforce	Bonuses are an additional cost for company, affecting the bottom line
Encourages management to clearly define company objectives and goals	Favoritism or discrimination can cause pay discrepancies
Retaining talented people and encouraging brand loyalty	Performance bonuses can spread tension and animosity in the workplace
Bonuses attract new talent	People may become dejected and unmotivated if they don’t receive an expected bonus

How are performance bonuses calculated? 

While every company adopts its own model to calculate performance bonuses, many organizations choose to reward their people annually with a percentage of their salary, upon the completion of predetermined targets. 

It gets a little trickier if performance bonuses are paid quarterly, monthly, or even on an ad hoc basis, as the total bonus amount is divided throughout the year.  

How much is the average performance bonus?  

On average, performance bonuses amount to around 2.5 percent-7.5 percent of an annual salary. 

According to Ceic, the average annual salary in the United States was $55,020, making the average annual performance bonuses stand between $1,375.50 and $4,126.50 per year. Forget national averages, certain careers can yield the big bucks. If you were lucky enough to play for FC Barcelona between 2014-2020, your contract included an €11,000,000 bonus for playing at least half of the team’s games during a season. Failing a football career, why not try investment or becoming a business magnate? The Tesla board reportedly agreed to pay CEO Elon Musk a 10-year bonus of $55 billion, the equivalent of 11 million Cartier watches. 

How can you ensure effective implementation of performance bonuses?

HR leaders can lead a collaboration between managers and their people to establish performance bonus criteria that effectively motivate the team and align with the company budget and goals. HR leaders can incorporate these steps to create a dynamic performance bonus system:

• Define criteria. HR leaders should establish the criteria they’ll be using to assess for performance bonuses, and ensure that managers and their teams understand it. Explaining the criteria to both provides each with the necessary information to do their jobs to the best of their ability. HR can also implement a performance metric-system to maximize employee potential and ensure objectivity and fairness.
• Train managers to coach their teams. According to Zippia’s 2022 research, 30 average Bonus Statistics, “Overall, bonuses lead to workers being eight times more engaged in the workplace”. Because managers play such a vital role in employee engagement, educating them to become effective coaches can directly enhance employee work performance and in-turn advance the company.
• Invite teams to take part in target-setting. HR leaders can invite team members to help establish attainable performance bonus goals. There is a higher probability that people will better grasp the tasks ahead of them and have the motivation to accomplish these tasks if they participate in the goal-setting process.
• Offer performance bonuses consistently. Performance bonuses should be granted according to a consistent timeline. This way, people can plan accordingly to meet deadlines and increase their chances of qualifying for a performance bonus.
• Align performance bonus goals with company goals. HR leaders can empower their people by integrating goals that promote both individual and company success. This allows their people to feel more engaged, knowing that their work holds meaning and importance.

How can performance bonuses improve company culture?

A performance bonus system that rewards professionals for their achievements and measures work performance fairly and accurately gives people a sense of accomplishment. They can experience professional growth, satisfaction from contributing toward the overall success of their company, and are more likely to bring positive energy and a good attitude to the company culture.