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FAQ-How do most companies calculate year-end bonuses?

Date: March 28 2001

FAQ - How do most companies calculate year-end bonuses

FAQ - How do most companies calculate year-end bonuses?


Q.   My company is thinking about implementing a year-end bonus program.   How do most companies calculate their year-end bonuses?   Is there a set calculation?


A.   Normally bonuses are paid as a percent of base, so you might start by calculating what it would cost to give everyone a 15% bonus, a 20% bonus (etc), and then top management will decide if that is affordable.


The opposite approach is to start with what is affordable, perhaps 5% of profits, and then distribute that as a bonus.


Often companies do this in an ad hoc way, the management, depending on their feeling of generosity, will set aside an amount for bonuses.


Other times a formula is created in advance based on financial measures like earnings before interest and taxes and revenue.   Normally there are targets that the company has to exceed for the bonus to kick in, and as the company results get better the bonus gets bigger.


Unfortunately there is no set calculation.   You need to evaluate the different methods and determine which one best suits your needs.