A bonus is extra money paid to employees in addition to their wages or salary. Sometimes called “incentive pay” or “variable pay,” bonuses are used to incentivize qualified candidates to work for the company, motivate employees to achieve organizational goals and reward employees for their contributions. All of this makes bonuses a highly influential tool for recruiting, engagement and retention.

According to a 2021 report by PayScale, “the majority of organizations (69.6 percent) offer some kind of variable pay as part of a total rewards package (e.g., bonuses).”

However, offering bonuses does not necessarily mean that the bonus program is successful. Here are three qualities of an effective bonus program.

1. It’s designed for your particular business needs

Bonuses come in many forms, and employer needs vary widely. Therefore, your bonus program should be tailored to your business strategy and compensation philosophy.

The 2021 PayScale report ranks these bonuses as the most popular among employers:

Individual incentive bonus (53.1%).
Employee referral bonus (34.2%).
Companywide incentive bonus (33.4%).
Spot bonus or other discretionary ad hoc bonus (30.8%).
End-of-year bonus (25.9%).
Hiring bonus (21.8%).
Profit sharing/stock options/equity bonuses (18%).
Team-based incentive bonus (16.9%).
Retention bonus (15.2%).

Though many employers offer a combination of the above, what’s suitable for your company depends on your business needs, what’s likely to motivate your employees, and your financial position and outlook.

Some businesses pay bonuses according to the employees’ length of service or a percentage of their salary. Others provide a small, flat amount. Some determine bonuses based on how well the business performs during the year.

Consider the objectives you’re trying to reach, and decide which bonuses can help you achieve them.

For example, you may offer:

Referral bonuses to existing staff if you need to employ more people.
Hiring bonuses for hard-to-fill roles.
Spot bonuses to employees who successfully complete a special project.
Stock option bonuses to retain key employees.

2. It’s financially realistic

Your bonus program should be within your financial reach. In other words, pay what you can afford.

If bonuses are tied to performance goals, assume that everyone will hit their marks when you are designing the program. This is the only way to be sure that you will have enough money to go through with the program no matter what.

3. It has clear parameters and expectations

Make sure employees know who’s eligible to receive bonuses, what constitutes eligibility, when to expect bonus payments and how bonuses are handled when employees terminate.

If bonuses are linked to performance, explain clearly to employees what they need to do to receive the bonus. This way, there will no misunderstandings when employees do not get a bonus because they failed to reach the established goals.

Your bonus policy should be equitable, documented, well-organized and consistently applied. It is also important to measure the program regularly to determine its success and in order to make the required improvements.