A Brief Introduction of Employee Bonus Plan
Nowadays, companies are coming up with many plans to motivate and retain their employees. In this fast-paced life, people have become like robots; they mostly work on auto-pilot unless they are given a goal to chase and a reward to receive. Companies have both incentive plans and bonus plans. While these terms are mostly used interchangeably, it should be noted that they are not always the same.
Employee Incentive plans are always goal-oriented and are given when the goals are achieved, while bonuses can follow many different guidelines depending on the company’s needs and requirements. Sometimes bonuses are ad-hoc too, which means that they are surprise gifts to the employees. A company’s Employee Bonus Plan outlines how the bonuses will be given to the employees.
Once all these details and plans are decided by the company, the company makes another document to share the details with the employees. It is really important for the employees to be informed about their company’s bonus policy. Companies mostly put a pool of money for their bonus plan. Other Employee Bonus Plan examples are milestone bonuses and performance bonuses. All these are different from Employee Incentive Plans.
When Do You Need the Employee Bonus Plan?
If you are an organization that wants to reward its employees and motivate them, the Employee Bonus Plan is for you. The section “bonus pool” of this plan contains a share of the net profits for full-time employees. You can also use this plan if you give an annual bonus and need your employees to sign an agreement that outlines the bonus procedure.
Sometimes, instead of disbursing cash, companies may decide to offer equity. In such case, an employee stock bonus plan would be drafted to identify how much equity would be diluted and in what way. Account managers of a business that offers bonuses also use bonus plan. This plan can be signed by all the employees or individual employees, depending on how it is designed. This document is used to motivate employees and give them a reason to work harder. It is flexible in nature.
Bonuses always incentivize employees to work for organizational goals. It rewards exceptional performance and acts as a means to retain top talent in the organization. These plans are structured so that eligibility is based on a certain set of criteria which as behavior modifiers that improve employee commitment to organizational goals. Companies may decide to offer bonuses when it feels that employee motivation is needed for pushing towards the expected outcome.
Inclusions in the Employee Bonus Plan
Like any other crucial plan, the Employee Bonus Plan will have the basic details of the employer. Basic details include name, address, phone numbers, etc. Further, the plan will have the names of all the employees who come under the bonus plan. It can be made for individual employees, too, in which case, the agreement will have basic details of that one employee.
Further, the plan lists down the details about how the bonus will be decided. Some companies would want to give ad-hoc bonuses, while others would want to set a goal. These details should be added to the plan. It is really important that the details are simplified in the plan so that all the involved parties can easily understand them, and there is no confusion. How the bonus will be calculated is another very crucial inclusion in the agreement.
How to Draft the Employee Bonus Plan?
To draft the plan, first, the company should have an internal review. All the important members of the organization should come together to decide a robust bonus plan for the company. Further, these people should decide what kind of bonus they want to offer. If conditions apply for a bonus, then these conditions should be decided with an intelligent thought process, as a badly designed plan can demotivate employees and harm the company in many ways.
The most important thing in an employees incentive plan is to determine the eligibility criteria. If the criteria are not defined clearly, this plan may serve to further demotivate employees on the allegations of favoritism and bias. Once the criteria are determined, effective communication is required to ensure employees’ participation in the plan. If communication hasn’t been done clearly, with only a few employees being aware, insinuations of red-tapisms and undue bias could demotivate employee performance.
Only by defining the goals of disbursing such incentives can organizations execute a successful plan. Clauses within the agreement must align with the intended outcomes. Since the ultimate goal is rewarding employees, the question of the period from which the work would be considered should be answered clearly. There is a good chance that several eligible employees would have left the organization. To prevent disputes, companies should not only define the eligibility criteria, but also define the employees and the period of employment pursuant to which they would be eligible in the plan.
The company should be aware of its reasons and purpose for distributing the bonus. The various aspects and elements of the bonus plan should be clear to the company. The plan should also be well written so that an employee can understand his organization better.
Benefits & Drawbacks of the Employee Bonus Plan
A well-drafted bonus plan will always help the company in various ways. The company has to ensure that the policies are such that they don’t demotivate the employees or don’t create unnecessary pressure or competition among the employees. There are no downsides to a bonus plan if it’s created with precision and carefulness. Here are some key benefits of a well-drafted Employee Bonus Plan –
- It motivates the employees to do better
- It gives a reason for the employees not to leave the organization and work towards a goal
- It attracts better employees
- It gives employees something to look forward to
- It helps the company achieve bigger and better goals
- It helps in the growth of a company
- It informs the employees about their rights and benefits
- It helps companies manage the expenditure
Key Terms/Clauses in Employee Bonus Plan
For each company, the plan can be different. Thus, there are no particular terms or clauses that a company needs to follow while designing a plan. However, some common terms can be – confidentiality, termination, cancellation, force majeure, etc.
If the company is giving a bonus to only certain employees, then it can put a term that stops those employees from revealing their bonuses to other employees. It will only create unnecessary competition. This can also spoil the atmosphere of an otherwise good organization.
What Happens in Case of Violation?
Sometimes the companies make a robust plan, but they don’t follow it. In such a case, the employee may feel cheated. If the plan is signed by both the parties and the company fails to pay the employee, he or she is well within its rights to approach a third party for help. It is suggested that parties refer to the plan and don’t let the matter escalate. However, if they fail to do so, they must approach the court.
Any employee can get excited and motivated if the company decides to offer him compensation beyond his or her salary. This is a very healthy way to grow a company and keep the employees satisfied. This also makes the atmosphere of a company healthy and electric. Organizations are advised to create a plan thoughtfully.
Here is an Employee Bonus Plan Template designed by our experts. Find the PDF and customize it as per your need.
Sample Employee Bonus Plan
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This agreement is made between Company and Employee on the effective date of 15th November, 2011.
Company represented by
Ms. Jennifer Garner
Address: 221 Lloyd Street #2, New Haven CT 06513
Contact number: (203) 469-1807
Employee represented by:
Mr. Hugh Warner
Address: 14 Kenny Drive, New Haven CT 06513
Contact number: (203) 466-3990
Terms and Conditions:
- This Bonus Plan Agreement will be administered and managed by the Board comprising of senior executives of “Lloyd Inc.”. The Board will be the final authority for interpretation and formulation of the terms and conditions of this plan, and any other agreements relating to the plan.
- Only those “Employees” who have completed at least one year of service with “Lloyd Inc.” are eligible to participate in the Bonus Plan. Participation of a new employee in the Bonus Plan can be modified if the Board finds that necessary and it will at their sole discretion.
- The Bonus amount calculation is mentioned in Paragraph 5, Section II of this Bonus Agreement Plan and will be distributed among the “Employees” based on the identification of certain aspects of the “Employees” by the Board including effort, involvement, and contribution, towards the growth and success of “Lloyd Inc.”.
- The Payout method for the Bonus amount will Cash or Marketable Securities.
- The Board has the right to amend or modify the Bonus Plan in whole or in part.
IN WITNESS WHEREOF, the parties “Company” and “Employee” have executed this Bonus Plan Agreement as on the date set forth which is 11/15/2011 (MM/DD/YY).
SIGNED FOR AND ON BEHALF OF COMPANY BY:
SIGNED FOR AND ON BEHALF OF EMPLOYEE BY: