What are bonus rules and regulations

Bonus: You have to consider that with the extra salary

Definition: Bonus - what is it?

Regardless of whether it is a premium or a bonus, all of the terms describe a variable portion of the remuneration, which is usually paid after the end of a financial year or after a successful business transaction. Some bonuses consist of a fixed sum, others are percentage-dependent on various factors of the respective employee or the company. Sometimes it's a mix of them. The range is also very wide. In the DAX corporations and investment bankers, around 80 percent of the salary is covered by bonuses. Some companies also pay all their employees a flat rate of 1000 euros at the end of a successful business year.

Target agreements and evaluation criteria

If no lump sum is distributed, but the bonus depends on certain performance of the individual employee or department, companies need criteria for their evaluation system. They decide on these with their employees in target agreements. Companies use both quantitative and qualitative criteria to assess success. Aspects on which bonuses are based are, for example: key figures such as balance sheets, profit, sales, the number of contracts concluded or the number of new customers. Customer satisfaction, punctuality or attendance are also possible criteria. In the target agreements, you should actively contribute and clarify where and at what intervals you will get information about your own success or that of your department, your company. Regular feedback discussions and an action plan with staggered goals help with this.

Target agreements should be thorough and detailed. Otherwise there is a risk of promoting pointless and possibly even permanently harmful business practices. One example of this is the criterion of new contracts. Employees could use this to persuade their customers to terminate old contracts in order to enter into new ones. Companies certainly do not want to encourage this.

Primary goal: motivation

Instead, the goal of bonus agreements is to promote employee motivation, to offer an incentive to work more efficiently, more focused or simply more. When employees achieve their goals, they receive more money and are motivated by the sense of achievement. That's the idea. But money certainly does not encourage everyone, and not everyone in the long run either. The motivation for a job that is permanent is intrinsic. After all, studies show that above a certain salary, satisfaction or the feeling of happiness does not increase measurably. In addition, you may not be in control of most of the factors that determine your bonus. Since this has a rather demotivating effect, companies should avoid such agreements.

Variable salaries can also be more easily adapted to the current company or economic situation than fixed salaries. In this way, companies can save money with low fixed salaries. If the company has a lot of orders, it can let its employees participate. If the company is not doing well, money can be saved just as easily. But complicated remuneration models can also result in additional administrative work.

In any case, you should make sure that you can secure your livelihood with the basic salary alone. Because bonuses offer too little security and predictability for you to do without them. Especially when you start again in a company and do not know how to assess processes very well, there are dangers lurking here.

Pay according to performance

Payment based on performance sounds fair at first: Those who achieve a lot get a lot. Those who do little get little. But if you use the individual candidate as a benchmark, ambitious employees tend to have higher goals that are more difficult to achieve. This can lead to unequal treatment within the team. But if the result depends on the work of the group and the individual has the feeling or actually has less influence than others, there is a risk of envy and resentment, although one actually wants to promote cohesion.

In addition, the system favors that employees generally set their personal goals rather low in order to earn the greatest possible earnings when they reach the goal. The individual employee then no longer concentrates on the company's overall success, but on personal incentives. As a result, non-measurable goals are neglected by the employees. Nobody feels responsible for it. So bonuses are sometimes poison for independent work. To counteract this, regular renegotiations of the target agreements are necessary.

Objective evaluation: routine versus creativity

Some activities are easier to evaluate than others based on key figures such as sales or the conclusion of contracts. And the assessment is then also easy to understand for the respective employee. For example with routine tasks. There rules can be processed that can be easily described and clear targets can be achieved that are understandable for everyone. This makes it easier for the company's HR departments to identify top performers.

If, on the other hand, you work in the creative industry, you need freedom and no fixed guidelines. The feeling of external control and the restriction of one's own freedom of choice let the wealth of ideas dry up. There is a risk that you will feel pressure from the target agreement and block it completely instead of getting into a creative workflow. And how should your company measure creativity?

Sometimes an objective performance assessment is simply not possible. Success is difficult to define, measure, and therefore difficult to understand. Just like the subsequent decision whether there is more or less salary at the end of the year. Measures must reflect goals, but that is not always possible. And if the assessment is not transparent, employees quickly feel treated unfairly and are demotivated.

sustainability

Furthermore, the sustainability of some bonuses is questionable. They are said to have triggered the last global financial crisis. After all, the German Bundestag passed the Act on the Appropriateness of Management Board Remuneration. In order for the company you work for to continue to do well, you should make sure that the bonuses are proportionate to the tasks and performance as well as the situation of the company. The usual remuneration may not be exceeded without special reasons. And the remuneration structure must be geared towards sustainable corporate development. Variable remuneration components should therefore have a multi-year assessment basis. There should be a possibility of limitation for extraordinary developments. Long-term incentives are intended to be more sustainable. Executives often have mid-term incentives or stock option plans that usually last two to three years. Employees can also be rewarded with training to help them grow. And companies can also use the money for charitable purposes.

Both companies and their employees have to consider a few things so that everyone is satisfied with a variable salary model.

  • Above all: be careful, the basic salary must at least secure your livelihood.
  • Detailed target agreements: If you have any concerns, definitely state them. Use the conversation to talk about other variables, such as vacation, company car, travel allowance or the like. Clarify how high the variable part is and what happens if you overshoot your target.
  • Careful selection of the evaluation criteria: The evaluation should be strictly clarified. Better to have several specific goals than a vague goal. If-then relationships are particularly suitable for this. Graduated goals, a concrete action plan with interim goals and measures make it easier to plan.
  • Regular feedback: at least once every six months. Otherwise your own assessment will not match that of your assessor at all and there is not much that can be changed about it.
  • Bonus yes or no, large or small portion of the salary: Depending on the job, tasks and experience, bonuses may or may not be suitable. Be careful if you're new to an area or if you don't know the company well enough.
  • Renegotiating new tasks and problems: Instead of ignoring new tasks and problems that arise, you should make them an issue.

Bonus salary increases the tax?

Once the employer and employee have agreed on a bonus payment, it can happen that at the end of the apparently so high payment there is hardly anything left. This is because the bonus payment increases your gross income and with it the tax that you have to pay on your salary. It can be more favorable in the case of a bonus payment if it is not paid all at once, but spread over twelve months. However, this has to be agreed with the employer.


Sarah Luisa Görtz, Editorial staff