Christmas Bonuses
Christmas Bonuses & Top Employee Bonus Schemes
For many employees, a Christmas bonus is a nice end to a long year of hard work. But the question of paying bonuses for employees is also worth considering for employers.
What is an employee bonus? When do they have to be paid? And how does paying a Christmas bonus (or other annual bonus) benefit your company?
This article is designed to give HR managers all the information they need when considering the impact of rewarding employees at the end of the year or at other times.
What is an employee bonus?
An employee bonus is a reward that the company gives to the employee for achieving certain goals. These are often variable and can be based on the employee’s performance, the company’s performance, or a combination of these two elements.
Is a bonus the same as an incentive?
An employee incentive is anything offered to motivate an employee to achieve a specific goal. This is usually a cash payment of a certain amount, which, however, cannot be equated with a bonus.
Although the term “employee bonus” is often used interchangeably with the term “incentive,” they are not the same thing.
Employee incentives are typically offered to influence future behavior. Bonuses can be used in the same way – but they can also be used to reward employees for good behavior in the past.
Ultimately, bonuses can be discretionary or non-discretionary.
What is the difference between a discretionary and a non-discretionary bonus?
A discretionary bonus is awarded at the sole discretion of the employer. This means that an employee cannot expect to receive a bonus. The employer is not obliged to provide a bonus, employees cannot expect that a specific amount will be paid or that it will be paid at a specific time, and non-discretionary bonuses are often not announced in advance.
In other words, when an employee receives a non-discretionary bonus, it is like opening a card from their grandma and receiving £50 for their birthday instead of the usual £5 – bonus!
A non-discretionary bonus is exactly the opposite of a discretionary bonus. The employer determines in advance what an employee must do to meet the bonus criteria, and if the employee meets the criteria, he or she receives the bonus. As simple as that.
Think of it like buying a Kinder Surprise egg. The worker knows there will be a toy in there – it’s not really a surprise – he expects it. However, the employer can vary the type of toy depending on what is stipulated in the contract.
Should you introduce an employee bonus program?
Employee bonuses can be an incredible way to incentivize employees. So basically you should introduce a reward system or policy.
Bonus schemes are good for improving company performance, keeping employees focused on achieving key goals and increasing motivation by linking their work to a specific result (pay).
Rewards, such as a Christmas bonus can also be structured to help align the wishes of employees with those of shareholders.
They can help encourage or support organizational change and reward employees when business is going well – in a way that doesn’t require an increase in annual payroll.
Bonus schemes can be very diverse and offered based on a variety of goals, groups or objectives. The CIPD, for example, lists various schemes including:
- Individual-related
- Based on business results
- Team related
- Project related
- Department/location related
- Profit sharing (where employees share in financial gains through improved performance)
- Combination
Are there different types of bonuses?
In any case! There are a number of different types of bonuses your company can introduce. Here are just a few of the most famous…
What is an LTIP bonus?
An LTIP (Long-Term Incentive Plan) bonus is commonly used for senior executives who are rewarded after several years, usually by receiving shares in the company.
The term LTIP is also sometimes used to describe any type of bonus that lasts more than a year. However, if your company is listed on the London Stock Exchange, the term LTIP has a very specific meaning (see LexisNexis for more information on this meaning).
What is a performance bonus?
A performance bonus is a financial (or other) reward an employee receives for achieving a certain level of performance. Often they are based on achieving goals – such as sales goals, business goals or profits. When performance goals are achieved, employees are rewarded.
What is a Spot Bonus?
A spot bonus is offered to employees “on the spot.” It’s a good way to give employees a quick motivational boost and, as HBR explains, “it will also help create a mental connection between company results and individual performance.”
They also say that a spot bonus for employees can improve team performance – especially if team members are encouraged to spend their spot bonus on others.
Believe it or not, when we spend money on others, we feel more connected and positive and develop a sense of security and well-being as a team.
What is a Christmas bonus?
A Christmas bonus is a bonus paid to employees at Christmas time. Even if employees expect a Christmas bonus, companies do not always have to give it.
There are some circumstances under which a Christmas bonus must be paid. These are:
- If it is stipulated in the employment contract
- When a Christmas bonus is implied by custom or practice
In the second case, if a behavior (such as the annual payment of a Christmas bonus) is continuous, long-standing, automatic, expected and known, that behavior actually becomes an implied term in an employee’s employment contract.
How common are Christmas bonuses?
Christmas bonuses are increasingly becoming a thing of the past in the UK, although according to research from Hawk Incentives, “a staggering 47% of employees say they would rather have a Christmas bonus than a Christmas party”.
In fact, the study found that 33% of British employees have never received a Christmas bonus from their employer and seven in ten employees believe they will stop receiving it soon.
Are employers legally obliged to pay Christmas bonuses?
In the UK, employers are not legally required to pay their employees Christmas bonuses, but your company may have a contractual right to a bonus.
Whether you have to pay a premium or not depends largely on the terms of the contract. If employees receive goal-based bonuses and have achieved those goals, you must pay them out – unless the employee agrees to waive their right to that bonus or agrees to a lower payment.
HMRC allows you to give employees a tax-free bonus of £50
Not paying your employees a Christmas bonus may make them feel like a Grinch, but the tax office can help.
HMRC grants a company an allowance of £50 which it can give to each of its employees each year as a tax-free gift or donation. This is called a trivial performance.
However, once the amount exceeds £50, the tax office will withhold a proportion of every penny paid to an employee. So if you give your employees a Christmas or other bonus gift, make sure you include taxes and national insurance.
HMRC explains that this applies to both cash and non-cash awards. (By the way, if a gift exceeds the £50 de minimis allowance, it should technically be declared on the employee’s P11D form and they should also pay Class 1A National Insurance on the value of the gift, according to the tax authority) .
How do Christmas bonuses help your employees?
A small gesture like a Christmas bonus or another type of reward can make a big difference. It shows employees that you are grateful for their work, commitment and efforts. Additionally, it can boost morale and create a sense of togetherness and pride.
But bonuses can be a double-edged sword: if used incorrectly, underpaid, or an employee feels like they’ve been cheated out of a bonus, the opposite could be true!
That’s why it’s important to plan and put together a solid compensation package right from the start.
In difficult times, maintaining employee motivation is even more important – and disappointing an employee by depriving them of a bonus they believe they are entitled to can be a major demotivator!
A lack of transparency in communication not only leaves employees resentful of their performance reviews, but can also severely impact their productivity and behavior or break their psychological contract with your company.
How do you communicate properly when you don’t pay out bonuses?
However, let’s be realistic. In difficult times, not all employers can afford to pay premiums. If this is the case, you should clearly tell your employees why this is not possible.
During the Covid-19 pandemic, there have been many examples of employees who not only understood this fact, but even helped the company by working part-time, agreeing to defer (or eliminate) bonuses, or engage in job sharing.
How does an employee bonus contribute to the corporate culture?
One way for HR to think about their work culture is to answer the question, “How do you want your employees to feel when they start their workday?”
Even if an employee bonus is not commonplace, it is still human nature to want to work towards something.
Incentive-focused rewards provide a focus for work efforts, give employees much-needed recognition when they achieve them (which is why it’s important to make goals SMART), and help them feel valued.
Employee rewards are another way to make employees feel valued and important. That’s why it’s so important to clearly communicate any changes to bonus structures, especially if the bonuses are unlikely to be paid out or not in full.
Bonuses are great, but clear communication is more important
We all love to be rewarded – like a Christmas bonus. And in good times, employee bonuses are an important tool to create incentives and reward performance.
While it’s nice to reward employees, ultimately it’s more important that they know and understand why you’re rewarding them (or not, if necessary). An open communication culture gives employees the feeling that they are being treated fairly.
That’s why it’s important to set clear goals that help employees make visible progress, pursue their goals and link them to payroll.
At IceHrm we make this much easier. Check out our employee performance product page to learn more about how you can make this tricky topic easier to manage so your HR team can spend more time being the heroes we know they are.