Is Incentive Pay A Bonus (Guide For HR)

Is incentive pay a bonus? Understanding the distinctions is critical to the success of a compensation and incentive system.

7
 min. read
April 8, 2022
Money being handed out

The words bonus and incentive are often used interchangeably, so it is no wonder constantly HR managers need to clarify the difference between the two.  

Both bonuses and incentives involve elements of remuneration that are given in addition to the employee's regular, recurrent pay.

Bonuses and incentives are intended to encourage employees to meet established goals as part of their job responsibilities and promote goal attainment and overall performance excellence. 

So, is incentive pay a bonus? Understanding the distinctions between these two phrases is critical to the success of a compensation or incentive system. 

What Is A Bonus?

A bonus is compensation given by an employer to an employee to supplement their base pay or salary. In other words, a monetary reward that goes over and above the recipient's normal payment expectations.

Management can use bonuses to recognize accomplishments, express thanks to employees who reach certain milestones or persuade new employees to join the organization.

Bonuses are considered taxable income by the IRS, so employees must disclose any bonuses they get when submitting their taxes. 

Another key difference between a bonus and an incentive is that bonuses are paid in arrears. Bonuses are a non-guaranteed and usually unexpected reward provided soon after the action that led to it.

A bonus can be paid in cash or cash equivalent, for example, stock options or other forms of equity. 

What Are The Different Types Of Bonuses? 

Signing Bonus 

A signing bonus is a monetary incentive offered by a company to persuade top-talent candidates to accept a position, particularly if competitors are vigorously pursuing them. 

Referral Bonus 

Employees who recommend candidates for available positions are rewarded with referral bonuses if the applicants recommended are successfully hired. 

Retention Bonus 

Companies pay retention bonuses to valued employees to encourage loyalty, particularly in downturns in the economy or during periods of organizational upheaval. 

This monetary reward is a token of appreciation that reassures employees that their positions will be secure in the long run. 

Performance Bonus 

Employees that perform well in their roles are rewarded with performance bonuses. They're usually given out once projects are completed or at the end of the fiscal year or general year end. 

Individuals, teams, divisions, or the entire firm may receive performance bonuses. A reward bonus might be a one-time deal or a recurring payment. 

Rewards Bonus 

These are one-time incentives that provide additional income to employees for various reasons. 

For instance, tenure milestones may be celebrated with further compensation. 

What Is Incentive Pay?

An incentive plan is a forward-looking payment or variable compensation tied to achieving specific objectives. 

Objectives are pre-determined and communicated to the employee well in advance. 

An incentive scheme motivates employees to go above and beyond to reach predetermined objectives.

Different Types Of Incentives

Incentives are generally divided into two categories: 

Casual Incentives 

These are smaller-scale rewards and acknowledgments, such as a non-monetary gesture or a small financial bonus for accomplishing a goal. 

They are generally an informal type of incentive award that can be given at any time. 

Because there are no pre-established plans or criteria, casual incentives are straightforward to implement. 

Simultaneously, because casual incentives have no clear structure, they risk employee distrust if they are perceived to be inequitable pay practices. 

Structured Incentives 

Structured incentives are clearly defined as part of pay incentive plans. 

It is an employee compensation system in which particular perks incentivize staff to work harder and achieve specific benchmarks.

These benchmarks are usually directly related to a corporate goal, such as improved revenue, higher customer service scores, or increased production. 

Bonus compensation goes above and beyond a paycheck or perks that a person should receive in exchange for their work hours. Non-monetary awards like event tickets, gift vouchers, or vacation days are frequently used in incentive programs.

Structured incentives are less likely to result in wage disparities. They do, however, require meticulous preparation and monitoring. 

Incentive Pay Examples

The idea is to incentivize employees to increase productivity while not reducing overall profit. 

It is imperative that organizations make measured decisions when determining the most efficient means of remuneration. Different types of rewards are known to elicit varying levels of motivation.

Cash-based Incentives 

Unlike bonuses, these rewards are communicated before the project, and employees clearly understand what they are working towards. 

Examples include: 

  • Quarterly or yearly bonuses
  • Commission for a sales role
  • Sign-on bonuses or performance bonuses
  • Company stock shares 

Organizations can pay cash in a lump sum once goals have been met or after a certain period of time has passed. 

While these rewards are not part of a base salary, it is common for these options to be viewed as part of overall compensation.

Non-Cash-based Incentives

Non-cash incentives can include a variety of options: 

  • Health and Wellness programs 
  • Education Perks 
  • Lifestyle Perks
  • Merchandise 
  • Connectivity 
  • Gift Cards
  • Significant scale incentives like travel 

When Is Incentive Pay A Bonus? 

An incentive can be in the form of a bonus when it is forward-looking and motivates excellent performance. 

Conversely, bonuses cannot serve as incentives as a bonus is only awarded at the discretion of a manager once a task has been fulfilled. 

Should Companies Consider Offering Incentive Pay?

Considering that employee retention is at an all-time low with a shortage of skilled workers and employees looking for lifestyle and educational benefits, there is no time like now to introduce an incentive program. 

There are numerous advantages to encouraging employees through the use of incentives.

  • It motivates employees to achieve the goals set out 
  • Incentive plans tied to earnings increase company earnings in proportion to employee performance. 
  • Increases loyalty to a company 
  • Decreases staff turnover 
  • Strengthens work relationships and company culture 

In Conclusion

Incentives and bonuses may seem similar, but they serve different purposes in the organization. 

An incentive is used to motivate employees to achieve specific goals that have been predetermined and agreed upon by both parties. It may be given in the form of money, gifts, vouchers, and/or experiences. 

A bonus structure is based solely on money and is given to employees over and above their normal expected remuneration. 

Whether your organization will benefit more from casual or structured incentives will be determined by the demands of your particular organization. 

However, there is no debate that employee rewards programs hold multiple benefits for businesses.