Blog
We keep you up to date on the latest tax changes and news in the industry.
Best Practices for Establishing an Effective Employee Bonus Pool
If you had to make a list of some of the most valuable resources that businesses have when it comes to attracting and retaining top talent, an employee bonus pool would undoubtedly be right at the top.
Despite the fact that unemployment is on the decline and things are getting "back to normal" in the wake of the COVID-19 pandemic, there's still a labor shortage in just about every industry you can name. Businesses are having a hard time filling available positions and if they do find someone with the appropriate skill set, it's difficult to keep them in the fold permanently before they wind up leaving for greener pastures. Things have gotten to the point where most job seekers say that they look at bonuses with more weight than they do even their starting salary - that's how important of a concept this is.
Thankfully, all hope is not lost. If you're an organizational leader who wants to make sure that your business is remaining as competitive as possible, there are a number of essential things that you'll want to keep in mind.
Establishing an Effective Employee Bonus Pool: Breaking Things Down
By far, the most important step that you should take when it comes to establishing an effective employee bonus pool involves building a budget to get a better idea of how things need to play out before you actually start the process in earnest.
Obviously, we'd all love to be able to promise any new hire the proverbial moon - whatever they're looking for is what we're willing to give them to see that person join the organization. But a certain amount of realism also has to enter the equation. What is the maximum amount you can afford to put into a collective employee bonus pool and how many people does that need to cover? What do you need to offer on a position-by-position basis in order to remain competitive? These are all questions that you need to answer before the start of the process so that you can make better and more informed choices moving forward.
Another best practice that most people should follow when establishing an effective employee bonus pool has less to do with the pool itself and is more about what happens in the weeks and months ahead.
Theoretically, if you're able to find the right person for the right position, that employee will generate enough value for the business to justify their own salary. In a lot of cases, they'll end up saving you money by way of performance gains. Whenever you see one of those situations arise where you've come in on-time and under budget, rather than simply using that excess money to pay out organizational leadership, be sure to put it back into the employee bonus pool.
This serves a few different goals, all at the exact same time. For starters, it incentivizes people to work their hardest because the more money they save, the more they ultimately get by way of bonuses. But in a larger sense, it helps save money on behalf of the business which only goes to represent funds that can then be funneled back into other areas of the organization where it can do the most good.
Finally, one must consider the actual structure of bonuses that are paid out from the pool throughout the year. Obviously, it's not necessarily "fair" to have someone who was hired last week get the exact same bonus as someone who has been with the company for five years or longer. Because of that, consider paying out bonuses at a rate that is based on the percentage of how much someone was paid by way of their salary.
This is a fair distribution model that again A) rewards people who have already put in a significant amount of time and effort to further company goals, and B) incentivizes people who may be more recent hires to put forth the same level of care and dedication in the future. If you are using equity as part of your bonus pool, software like Carta can help you determine market rates for positions across the country.
If you'd like to find out more information about the best practices you should follow when establishing an effective employee bonus pool, or if you just have any additional questions that you'd like to discuss with someone in a bit more detail, please don't delay - contact us today for additional assistance.
Sign up for our newsletter.
Each month, we will send you a roundup of our latest blog content covering the tax and accounting tips & insights you need to know.
We care about the protection of your data.
“We are always looking to grow our business. Should you have any clients, friends, business associates looking for high quality accounting services from a CPA firm, please have them contact us.”
This e-mail (including any attachments) is only for the exclusive use of the individual to whom it is addressed. The information contained hereinafter may be proprietary, confidential, privileged and exempt from disclosure under applicable law. If the reader of this e-mail is not the intended recipient or agent responsible for delivering the message to the intended recipient, the reader is hereby put on notice that any use, dissemination, distribution or copying of this communication is strictly prohibited. If the reader has received this communication in error, please immediately notify the sender by telephone or e-mail and delete all copies of this e-mail and any attachments.
IRS Circular 230 Disclosure: In order to ensure compliance with IRS Circular 230, we must inform you that any U.S. tax advice contained in this transmission and any attachments hereto is not intended or written to be used and may not be used by any person for the purpose of (i) avoiding any penalty that may be imposed by the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.