Advantages & Disadvantages of Bonus Payments

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Advantages & Disadvantages of Bonus Payments
A bonus can affect an employee's work. (Jupiterimages/Photos.com/Getty Images)

At the end of the year, many companies give bonuses to some or all employees. A bonus is an additional payment received on top of your regular salary, often either during a holiday or at the end of the quarter; the amount of the bonus will depend on your company. Management personnel often sit down and go over each employee's hours and work performance reviews, to decide who will get what.

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Advantage: Incentive and Motivation

A bonus payment to an employee can be used as an incentive, especially in a field where employees must make sales or meet specific goals. Set a goal for each employee or the entire group, with a cash bonus option for the employee that reaches that goal. Use bonus payments to motivate a sales team into obtaining more sales for the month, quarter or year.

Advantage: Appreciation

Bonus payments do not have to be awarded on a holiday, at the end of the year or as an incentive. A bonus payment can also be used as a means of appreciation for an employee's hard work throughout the year or in a specified amount of time in the year. Receiving a bonus payment will not only show the employee he was appreciated for his hard work, but it will motivate him to continue to work hard for further rewards.

Disadvantage: Costly for Company

A cash bonus can be costly for any company. A company must calculate whether it can afford yearly bonuses, holiday bonuses or the use of incentive and reward bonuses---and for how many employees. Companies can consider using gift cards or other gifts as a bonus rather than using cash.

Disadvantage: Taxes

When an employee receives a bonus, it becomes part of his total income at the end of the year. That means the employee will also be paying taxes on the bonus he receives. Bonuses that are relatively small will not affect an employee's Adjusted Gross Income, but bonuses that are a large lump sum can add up to higher taxes at the end of the year.

Disadvantage: Fairness and Jealousy Issues

Because bonuses are paid out in several different ways---incentive for meeting goals, performance, profit sharing or end-of-the-year/holiday bonuses---employees may not always receive the same amount or percentage. Incentive, performance and profit sharing bonuses are all earned by the employee himself, but other employees may become jealous of the employee's good fortune. Holiday bonuses and end-of-the-year bonuses are often figured out by seniority, work performance and other factors to determine the monetary amount, though some employers give the same amount to each employee. Both methods can cause issues of fairness. For example, if one employee has worked for a company for 10 years and another employee has only worked for two years, but the 10-year employee is always late and hardly works while the two-year employee works extra hours and has never missed a day, it might not seem fair to award bonuses based solely on seniority. The two-year employee might feel as though he is not being rewarded for his hard work.

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