How To Calculate Year-End Bonuses

by | Dec 16, 2020

As the end of the year draws closer, many organizations dive into determining those year-end bonuses for their employees.

Year-end bonuses are a common way to keep sales teams motivated no matter what season it is.

If 2020 has taught us anything, it’s that year-over-year growth isn’t a guarantee. And if you’ve based year-end bonuses solely on that metric, it may leave your employees a little disappointed. It’s one reason to remember to be flexible when it comes to doling out bonuses during a pretty unpredictable year.

While there really are no standard rules for how to award bonuses, it’s common for companies to incorporate bonuses into employee compensation. As we work with many companies like this, we’ve seen a number of common practices and how they often play out.

For those exploring or reevaluating bonus plans after the roller coaster of this year, we’ve reviewed some of the values, calculations, and best practices businesses often take into account when setting or revisiting bonuses.

Values Used to Determine Year-End Bonuses:

  • Revenue Objectives: The amount a company earns through sales and other income-generating activities may be a good indicator of the health of the organization overall. Many businesses choose to use this number as the metric that determines bonuses. They do this by setting a revenue goal and then distributing bonuses based on the percentage of that goal achieved.
  • Profit Margin: As opposed to gauging revenue, businesses occasionally look to profitability as a measure of success for the organization as a whole. Narrowing in on that metric often allows employers to reward bonuses based on a percentage of payroll. This type of bonus is most commonly called profit sharing.
  • Department Goals: A bonus occasionally depends on the performance of a team, department, or territory. The size of a bonus may be determined by how well a group of employees reached their collective goals during the course of the year.
  • Net Customer Growth: If customer gain is more important to a business, it may use that metric to determine how much employees earn for their final bonus. More often than not, a metric like this determines quarterly or monthly bonuses but it can also factor into a year-end bonus, especially if other bonuses are not distributed.
  • Customer Retention: For employees or teams focused on minimizing customer churn, this may be a good metric to track as part of a performance review for bonus attainment.
  • Activity Thresholds: In establishing key performance indicators for an employee or a group of employees not directly involved with sales or recurring revenue, activities that support or enable other functions throughout the company can be used. Employers or managers lay out specific tasks or projects to be completed in order for individuals or teams to obtain bonuses.
  • Employee Performance: When deciding how to reward each individual bonus, employers typically consider how each employee has performed during the course of the year. Ultimately, an employee’s ability to meet targets, quotas, or goals will factor into the bonus distributed.
  • Combination: Many quotas may incorporate a combination of all or some of the above factors.

Calculations in Year-End Bonuses:

  • Percentage of Salary: A simple way to calculate bonus is to apply the above metrics to a percentage of an employee’s salary. Perhaps each employee can earn up to 7% of their annual salary. The final amount awarded depends on how well the employee, their department, and/or the company as a whole fulfilled expectations.
  • Portion of Payroll: In situations involving profit sharing, employers may determine bonuses as a percentage of overall payroll and distribute that amount among employees.
  • Predetermined Amount: As an alternative to basing bonus amounts on salary, organizations may simply set aside a fixed sum that each employee can earn if all targets are reached. It’s possible for the employee to earn all or a portion of that amount based on goal attainment noted above.
  • Floors: Occasionally businesses implement certain baseline requirements. This means that a company as a whole, a team, and/or an employee must reach at least a certain percentage of goals before they can begin earning any of their promised bonuses. For instance, employees cannot begin earning bonuses until at least 75% of the business revenue goal is fulfilled. After that, the percent of goals attained is applied to the total amount that can be earned.

Best Practices for Year-End Bonuses: 

  • Outline the Bonus Plan Early and Often: Ensure that employees fully understand what’s expected of them — and of their peers — to reach a level at which they can earn their bonus. It’s also important to detail the amount each individual has the capacity to receive in order to provide them information they need to plan personal financials.
  • Provide Clear Explanation: A good way to prepare employees for their eventual bonus disbursement (if they achieve that) is to meet with them during the year to review performance, point out their successes, and encourage improvements where needed in order to reach their full bonus.
  • Be Flexible: Given that unforeseen events outside of anyone’s control can impact revenue, goals, customer churn, and other factors, it’s important to plan for shifts how bonuses may be determined. This will help keep employees motivated even in the face of difficult circumstances and allow employers to retain promising talent.
  • Evolve: As the company grows and changes, the bonus program needs to mature right alongside it. Continue to evaluate and reevaluate the bonus program, as well as the overall compensation plan for your company, on a regular basis — at least once per year. Adjust as needed.

If you’ve got your bonus plan figured out, we can help automate those calculations and simplify the entire process for you. Ask us for more information or book a free demo and we’ll personally show you how it all works. Until then, we wish you and all of your employees a happy new year!

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