# How to calculate employee bonuses

Written by tamara wilhite
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Bonuses are extra pay provided to employees above and beyond their regular salary, hourly wages, or commissions. Used correctly, bonuses can improve employee performance and loyalty. Set too low, employee bonuses become demoralising or devalued. Employee bonuses can be calculated based on an even distribution to all employees, a reward to star performers, or be given as a percentage of each employee's salary.

Skill level:
Moderately Easy

## Calculation

1. 1

Determine how bonuses are to be decided. Bonuses can be based on a percentage of the employee's salary, sales generated, or as a reward to stellar employees.

2. 2

Create a list of all employees who are eligible for bonuses or are named by management as deserving of bonuses. If bonuses are to be based on their current salary, include the salary of each nominated employee.

3. 3

Review the company budget to determine how much money is available for employee bonuses. Determine the employee bonus budget upon which individual employee bonuses will be calculated.

4. 4

Divide the budgeted amount for bonuses among the employees. If an equal amount is to be given to each employee, divide the bonus budget by the number of employees eligible or nominated. If bonuses are to be based as a percentage of each employee's salary, first total the salaries of the nominated employees. Then divide the bonus budget by the salary total. This provides a percentage to apply to each employee's salary to provide bonuses to each with an equal weight to their individual salaries. For example, a £65,000 bonus budget for employees making a total of £650,000 becomes 10% or 0.1. Then an employee making £13,000 receives a 10% times £13,000 or £1,300; someone making £32,500 receives a 10% of £32,500 or £3,250 bonus. If 100 employees were to receive an equal bonus from the £65,000, then each employee would receive £65,000 divided by 100 or £650 bonus.

5. 5

List the bonus amount to be given to each employee, whether it is a lump sum equally divided among employees or set as a percentage of each employee's pay. Provide this list to the payroll department so that the calculated employee bonuses can be paid to each eligible individual.

#### Tips and warnings

• If employee bonuses are based on stellar performance, give guidance on how employees can improve their performance in order to earn those bonuses.
• Minimise legal risks by warning employees with poor performance early on that they may not be considered for a bonus if poor performance continues. This reduces the risk of favouritism or bias if the employee is not given a bonus later.
• Setting a high bar for performance bonuses that no one can reach is demoralising.

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