A bonus is a payment to an employee that is outside of their pay structure. An employee bonus is given as a reward for a specific behavior or achievement.
The purpose of a bonus is to:
- Motivate employees
- Attract and retain top performers
- Align employees to desired outcomes
- Make employees more committed to goals
- Help employees link their performance to the success of the organization
What Is A Spot Bonus?
Spot bonuses are an ‘on the spot’ reward for employees that are given immediately as a reward for a particular behavior, achievement, or action. Spot bonuses are awarded to individuals and not to teams. They are usually reserved for employees and not the upper levels of management. An employee can receive any number of spot bonuses a year.
Advantages Of Spot Bonuses
Spot bonuses are more frequent than other bonuses. They give the rewarded employee a feeling of being rewarded more frequently. This is a pattern that is more likely to sustain employee morale and happiness over a period of time. Recurring chances to earn rewards also keeps employees motivated to always perform at their best.
While annual bonuses also reward the employee, there is a long gap between the achievements and the reward. The annual bonus loses the ability to create the ‘high’ and feeling of elation immediately after an achievement. This immediate reward after an achievement helps the employee tie their levels of performance with the success of the company easily.
When bonuses and rewards are team-based, there is no differentiation between the over performer in the team and one who does the bare minimum. However, individual bonuses recognize and reward the actual stellar performer and encourage all the employees to step up and perform. And since the bonuses occur frequently, there are more chances for others to also achieve a spot bonus.
When a spot bonus is a reward such as an experience that can be shared with others, the bonus has more of an impact.
A spot bonus is more than money that is spent to reward an employee, it is also an opportunity to connect with the employees. When the organization rewards an employee, it grabs the attention of all the employees and is a great opportunity to reinforce the organization’s goals.
Spot bonuses are smaller bite-sized rewards that reduce the cost burden of bonuses on the company. While giving an employee a raise or a larger annual bonus may be more expensive for organizations, spot bonuses are more cost-effective.
Disadvantages Of Spot Bonuses
The methods and reasons for giving our spot bonuses should be very transparent, consistent, and unambiguous for spot bonuses to be effective. If the reward is more dependent on the immediate manager’s discretion rather than set criteria across the company, spot bonuses can create dissatisfaction among employees.
Sometimes spot bonuses are awarded verbally but the disbursement of it is pushed away. This nullifies the immediacy of the reward and may lead to demotivation. Automation of rewards through technology solutions makes the award of spot bonuses quick and easy for the organization as well as the recipient.
Sometimes, too much of a good thing can have the opposite effect to what is desired. When companies use the same rewards repeatedly, it leads to satiation or boredom. Organizations should think out of the box or use a reward platform such as Plum to offer employees a varied and exciting choice of awards. The organization does not have to worry about selecting the award or disbursing it as it is handled by Plum.
The reward size or amount should be decided carefully and be tied to the specific behavior that is being rewarded. Employees will expect future bonuses based on past bonus values. If the subsequent bonuses do not live up to the expectations of the employee, they cause more demotivation than reward. Rewards systems such as that of Empuls help companies categorize and plan their reward structure better.
If one employee continually outperforms all the others, they may be rewarded spot bonuses very frequently. This may demotivate the others to compete. To avoid this situation, it may be better to reward this employee with a raise and create a more level playing field for spot bonuses.
Annual Bonuses
Annual bonuses have been around a long time. They are the lump sum bonuses that are given at year-end or at festival times annually. Some companies also pay bonuses half-yearly or quarterly. Annual bonuses can also be tied to a review process to determine the size of the bonus that each employee is to get.
Advantages Of Annual Bonuses
Most HR personnel and finance departments are very familiar with the concept of an annual bonus. They find it easier to compute an annual bonus rather than continually monitor employee performance. However, software tools and solutions such as Plum have made spot bonuses easy to manage.
An annual bonus payment gives the employee a lump sum to look forward to at the end of the year. This amount may be useful for them to take a vacation or celebrate a festival. Not all employees have the financial discipline to allow their spot bonuses to collect and form a larger sum. For such people, an annual bonus is advantageous.
Though an annual bonus does not have the instant gratification that the employee gets from a spot bonus, it does show appreciation for the achievements of the employee.
Knowing that a review of their overall performance will determine the bonus amount is a motivation to work through the year. It is the responsibility of the company to help employees understand what actions and achievements led to appreciation.
Disadvantages Of Annual Bonuses
Having to pay many employees a lump sum of money at the same time may be a financial strain for the company. Also, annual cash bonuses are often more expensive than smaller spot bonuses that are handed out year-round. Companies can give out other awards such as those available on the incentive and rewards platform Plum instead of a cash payment.
A larger bonus payment in cash may have tax implications for the employee. While a raise in salary will also increase the other benefits that are calculated based on salary, an annual bonus will not lead to other benefits. Smaller spot bonuses may not impact taxes.
While a spot bonus rewards a specific achievement, not all companies are able to clearly communicate how each individual performance has helped the company. Annual bonuses reward overall achievement rather than specific goals.
When there is no transparency in the process used to determine the amount given out to each employee, there may be problems created by the annual bonus. An employee who thinks that they deserve more will be disgruntled and unmotivated.
Companies that award annual bonuses may find that an employee who plans to leave will wait for the bonus payout before leaving. There may be a mass turnover of employees after a bonus payment.
Key takeaways
The choice between spot bonuses and an annual bonus payment depends on the company. Both have their own inherent pros and cons. Spot bonuses are less expensive than annual bonuses. Software solutions have made both types of bonuses easy to manage. Employee reward platforms like Plum give both companies and employees the freedom to choose rewards that are far more exciting and memorable than a simple cash payout.
