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How to Determine New Employees' Annual Bonuses

When to Give an Annual Bonus to a New Employee

Chances are, you have recently been tasked with the job of determining (or at least helping to determine) what your employees’ end-of-year bonuses should be. With your long-term employees, you've have had some historical practices, as well as a, hopefully, comprehensive performance review to rely on to help you. But what do you do with employees who haven’t been with the company for a full year, including those who may have joined very recently? While there are no hard and fast rules, here are some approaches for you to ponder.

Luck of the draw. Some companies have a firm policy that says that employees who haven’t been with the company for at least a full year (or some other arbitrary cut-off date) are not eligible for an end-of-year bonus. It is the luck of the draw, so to speak, when an employee starts with the company. This is certainly a valid business choice, and may seem desirable these days when budgets are tight. But, it may come at a cost, especially if you have some outstanding new employees who are not recognized at a time when everyone else is.

Categories. You may decide to split up your new employees into categories. For example, employees who have been with you for under three months may receive a small lump sum bonus, say $100. Employees who have been with you for three to six months may receive a slightly larger lump sum bonus. Employees with you for six to nine months may receive a sum slightly larger still. And employees who have been with you for nine to 12 months may be eligible for the full bonus under the same parameters as all your longer-term employees.

I have personally been with a couple of companies with whom I started shortly before the holidays and received this type of small lump sum bonus and, I have to say, that it made a difference. While I wasn’t expecting it, I certainly appreciated it. And even more than the money, I appreciated having my contribution recognized and acknowledged. From a business perspective, that small expense paid for itself and then some in the value it added by creating an atmosphere of employee appreciation right from the start.

Prorate. When you prorate, you use the same parameters you would use for your long-term employees, but adjust the bonus based on the number of months the employee has been with you. For instance, if an employee who has been with the company for over a year would be eligible for a five percent bonus, then a new employee in the same position who has been with the company for six months would be eligible for a 2.5 percent bonus (half the year=half the bonus).

Of course, you have to keep in mind that you may have hired someone within the past year who clearly isn’t performing well, in which case I recommend you refer to rule number one in compensation: don’t reward a poor performer!

Be Consistent

Keep in mind that whichever option you choose should be used across the board – if you decide to go one route with one employee and another route with another, you may open yourself up to liability. Above all, your bonus practices should stay in alignment with the company’s compensation strategy, as well as the overall business strategy. And finally, at the end of the day, make sure you stick to the budget. If you can’t stay within your allotted budget, you run the risk of your CFO cutting the bonus program altogether.

Regards,

Melissa Quade
Compensation Consultant
PayScale, Inc.

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