Year-End Bonus

What is a year-end bonus?

A year-end bonus is a reward given to an employee at the end of the year. Considering the timing of the bonus, companies, and professionals often refer to it as the Christmas Bonus.

Although the term bonus can be monetary or non-monetary, year-end bonuses are typically viewed as a monetary benefit that’s paid to a company’s employees depending on their performance, the company’s profits, and the state of the economy. 

An organization can independently choose to pay year-end bonuses to its people. It’s not mandated by law. However, the year-end bonus serves as great motivation for employees’ hard work and promotes healthy competition. Many organizations use benefits administration software to plan and administer employee benefits while complying with legal regulations.

Software de Year-End Bonus

Software que menciona year-end bonus como recurso ou termo.

PurelyHR

Types of year-end bonuses

Structuring a year-end bonus is tricky when employers aren’t aware of options. The various types of bonuses to establish a year-end bonus structure are as follows.

• Performance-based bonuses are based on achieving a goal, quota, or designation, or exceeding the company’s performance expectations.

• Non-performance bonuses are given out for an employee’s tenure in a company, during an appraisal cycle, or after crossing a milestone. 

• Non-monetary bonuses include gifts, vacation days, paid time off, or employee recognition.

How to calculate year-end bonuses

After a company has structured all the elements of its year-end bonus, the next step is calculating the reward payments. Below are some things employers should consider while determining end-of-year bonuses for their employees. 

• Seniority: Employers can decide on paying larger rewards for senior members of the staff. People in senior positions usually have higher performance targets. 

• Pay scale: Employers can give a combination of a bonus rate and a lump sum payment to people with low pay scales. 

• Company performance: Employers also have to consider the state of the economy and the company’s performance to figure out year-end bonuses. When both are good, employers are benevolent in sharing profits. 

• Tenure: Employers think about employees’ tenure while calculating year-end bonuses. A person on a probation period won’t receive the same bonus as someone who has served a company for several years.

Benefits of rewarding year-end bonuses

Some advantages of paying year-end bonuses to employees aside from their usual compensation include

• Employee motivation. Year-end bonuses encourage a company’s team to work hard and help their department to succeed. Motivational incentive acts as a catalyst for achieving professional targets, goals, and the department’s objective and key results (OKRs).

• Constructive competition. Year-end bonuses promote constructive competition among high-performers that helps them push their limits. Performance-based year-end bonuses motivate employees toward their best efforts, enhancing their performance and producing maximum output for the company.

• Top talent acquisition. Generous performance-linked bonuses help companies stand out to attract and retain top talent in their industry.

• Morale booster. Bonuses make employees feel valued for all their efforts and hard work that fuels a company’s success.

Best practices to create and execute a year-end bonus plan

While sharing the company’s success with the team, employers can design a year-end bonus plan and follow these best practices to execute it.

• Start early. Companies should plan out the next year’s bonus before the year starts. It’s critical to identify the key metrics for success and regularly share progress with the team.

• Use profits above-set targets. A year-end bonus plan should be able to self-fund itself through the profits generated above-set targets.

• Make bonuses substantial. Paying generous bonuses influences employees' behavior and motivates them to put in their best efforts.

• Keep bonuses separate from normal pay. Bonuses shouldn’t be combined with regular paychecks, so employees perceive them as additional rewards rather than entitlement.

• Be strategic in announcing year-end bonuses. If everyone in the company is getting the bonus, a group announcement in an all-hands meeting works. However, if it’s a performance-linked bonus being given to specific employees, announcing it during a one-on-one discussion is better.

13-month pay vs. year-end bonus

13th-month pay is one month’s pay given to employees by an employer in addition to the annual salary. In some countries, it’s paid at the end of the year. However, it's different from a year-end bonus.

13th-month pay is mandated by legal authorities in the Philippines, Indonesia, Belgium, Greece, and many other countries. On the other hand, a year-end bonus is not mandated by law and doesn’t come under the legal obligations of an employer, unless they have promised to pay them out in a contract.

Employers can choose to pay year-end bonuses based on their will. Conversely, employers have no choice but to provide 13th-month pay. In some countries, the timeline of 13th-month pay coincides with the end of the year. However, some employers split up 13th-month pay into two parts: one part is paid in the middle of the year, and employees get the other half at year’s end. 

Learn more about sign-on bonuses and how it helps hire top talent in a company.