Employee bonuses and incentives are two of the most widely used terms in employment. Both of these terms are very familiar to employees as they receive bonuses and incentives as part of their remuneration. The purpose of bonuses and incentives is to motivate employees to achieve set targets as part of their role and promote the achievement of goals and excellent performance in the workplace. However, the two terms are often misused because they are both payments additional to an employee's normal and recurring salary. Understanding the differences between these two terms is very important as this will greatly help in the success of any bonus or incentive scheme.
A bonus is a payment that is backward-looking. The payment is decided by the management whether to give the bonus to one or more employees to reward past achievements such as being able to reach a target number of clients, profit, or some other important milestone for the company. Bonuses are usually paid in cash or a cash-equivalent form so long as it provides value to the employee or employees receiving the payment. Generally, bonuses are not guaranteed and are decided after the achievement of goals.
An incentive, on the other hand, is a forward-looking payment. It is associated with a specific plan and objectives and is focused on performance. Unlike bonuses which are given and communicated to employees after reaching a goal, incentives are communicated to employees beforehand. And because incentives are tied to a plan, it tends to influence behaviour and motivate employees to work towards the goals. Incentives may be given either in cash or non-monetary rewards such as gifts, travel incentives, additional leave, and even group activities. Once an incentive plan is agreed upon and implemented, it must be honoured if the employee or employees achieve the goals and targets set out in the incentive plan.
It is essential to understand the differences between a bonus and an incentive because these two types of compensation elicit different reactions from employees. It is also important to be consistent with the use of these two terms to avoid confusion especially in official communication between employers and employees. It is also important to consider the organisational culture, the company's goals and the workforce to ensure the success of a bonus or incentive scheme.
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