FAQ - How do most companies calculate year-end
bonuses?
Q. Â My company is thinking about
implementing a year-end bonus program. Â
How do most companies calculate their year-end bonuses? Â Is there a set calculation?
A. Â 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. Â 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. Â You need to evaluate the different methods
and determine which one best suits your needs.