What is a performance bonus?

A performance bonus is a financial reward given to employees as recognition for achieving specific goals, or for exceptional performance. It is a variable component of pay that supplements your employee’s regular salary, and is typically tied to specific targets or metrics.

Performance bonuses can have a positive impact in several ways, such as:

Motivation. They encourage employees to perform at their best by linking rewards to performance.
Recognition. They acknowledge and reward employees for their contributions and achievements.
Retention. They help retain top talent by creating more competitive compensation packages.
Alignment. They align your employees' goals with your company’s strategic objectives, driving overall business success.

Examples of a performance bonus

Performance bonuses can come in many shapes and sizes, but typically, they are one of (or a variation of) the following:

Individual performance bonus. A salesperson exceeding their quarterly sales target might receive a performance bonus of 10% of their base salary.
Team performance bonus. A project team that completes a critical project ahead of schedule and under budget might receive a shared bonus, divided equally among team members.
Company performance bonus. Employees might receive a bonus if the company achieves its annual profit targets, with the bonus amount based on a percentage of their annual salary.
Customer satisfaction bonus. Customer service representatives might receive bonuses based on achieving high customer satisfaction ratings or resolving a certain number of customer issues efficiently.

Benefits of offering performance bonuses

While the rewards are obvious for employees, performance bonuses can also benefit you as the employer, too. For instance, they can:

Enhance performance. As the name suggests, performance bonuses motivate employees to achieve high performance and exceed their targets. This leads to improved productivity and business outcomes.
Improve employee satisfaction. Recognizing and rewarding employees' efforts through performance bonuses can enhance job satisfaction and morale.
Boost retention and attraction. By their nature, performance bonuses help you attract and retain top talent.
Drive alignment and success. Tying bonuses to specific performance metrics ensures that your employees focus on key business objectives, and contribute to your company’s success.

Best practices for performance bonuses

If you’re going to offer performance bonuses, ensure you:

Define the criteria. Create clear and measurable performance criteria for awarding the bonuses.
Conduct regular reviews. Conduct regular performance reviews to assess the effectiveness of your rewards program, and to ensure fairness.
Communicate the program clearly. Clearly communicate the bonus structure and criteria to employees, so that they understand how their performance impacts their compensation.
Budget accordingly. Don’t promise people something you can’t afford. Thoroughly plan and budget for performance bonuses to make sure they’re deliverable and sustainable.

Performance bonus