Difference between a bonus and an incentive, a guide.
You might be considering offering some kind of incentive scheme, or bonus program within your company. One of the considerations might be understanding the difference between a bonus and an incentive. As experts in understanding and implementing incentive schemes, we’re laying out the difference between a bonus and an incentive in the context of a workplace environment.
The key difference between a bonus and an incentive is that bonuses are typically given out in response to short-term goals, or as a gift after the fact. While incentives are typically given out in response to long-term goals and are often communicated and set in place in advance.
Bonuses and incentives have been a part of the workplace since the early days of the industrial age.
They were notoriously developed by Ford Motor Company in the 1900s. Henry Ford famously used bonuses to incentivize his workers, and still, today bonuses are often given out on a one-time basis after the completion of a project or task.
But his bonuses were outlined in advance – so does this mean they were more incentives than bonuses?
Read on to discover more detail about this subject and the dynamics around which program does what…
Difference between a bonus and an incentive a guide
The difference between a bonus and an incentive becomes clearer as we understand what a bonus is, and what an incentive is. So let’s start with what a bonus is.
What is a bonus in the workplace?
A bonus is an additional payment made to an employee, usually as a reward for doing something extra.
Bonuses can be given as a one-off gift or sum, or as part of an ongoing scheme. They are often linked to specific tasks or levels of performance. They do not necessarily have any long-term implications.
A Bonus can often take the form of:
- A cash bonus
- Gift cards
- Extra vacation days
- Other non-cash rewards (e.g. branded merchandise)
A bonus can also be used to reward an employee for long-term loyalty or for reaching a particular milestone at the company.
As mentioned, bonuses are typically one-time payments given in response to successful performance, such as meeting sales targets or completing a project on time.
So, unlike incentives, bonuses rarely have any long-term implications; they are given at particular times, and often at short throughout the year as recognition of achievement.
The promise of potential bonus payments may also be used to motivate employees and encourage increased productivity. They can simply be discretionary bonuses.
Check our article to learn more about discretionary bonuses vs performance bonuses.
The problem with bonuses
The main issue regarding giving out a bonus is that it can be seen as a short-term solution, rather than a long-term strategy to retain and motivate employees.
Additionally, bonuses are usually only given when goals have already been achieved – therefore there is less incentive for employees to go above and beyond what is expected of them.
Bonuses are also often given without strategic planning involved, so one employee might earn a bonus while another might not, even if they both arguably contributed equally to the task. This can lead to feelings of discontentment and unfairness among employees.
Whether these would affect your particular company is something we can address in our quick 15-minute demonstration, or by calling us now.
So now let’s look at what an incentive is…
What is an incentive in the workplace?
An incentive is a payment or reward that encourages someone to do something, usually something beneficial for their employer.
Incentives have also been shown through studies to encourage employees to remain at a company for longer.
One such study found that regarding staff retention…
“Organizations that offer strong benefits and incentives to employees reduce the likelihood of turnover by 26% and increase retention by 14%.”
Incentives are more often than not linked to performance; they may be offered as part of a regular scheme or as specific rewards for specific achievements.
An incentive is typically something that is only given when certain conditions are met.
In some cases, incentives can involve recognition and career progression opportunities, such as special training courses or promotions.
Unlike bonuses, incentives are based more on long-term performance and usually have ongoing implications.
Incentives can often be given as:
- Additional training and development opportunities
- Greater responsibility and/or leadership roles
- Access to better benefits packages (healthcare, retirement plan, etc.)
- Branded merchandise and/or greater recognition for their efforts
- Performance-related bonuses or a share of profits
For an individual employee, department, or company-wide scheme, they may be rewarded with an incentive as part of a long-term performance plan that recognizes how they have contributed to the organization’s success.
Incentive schemes don’t just work for large corporations that need structure in place, they are also great for small businesses, check out the list of ways incentive schemes benefit small business.
Incentives benefit companies as well as employees
Incentives also provide companies with an opportunity to differentiate themselves from competitors and increase worker loyalty through reward programs.
So in comparison to bonuses, incentives offer a more long-term strategy for motivating employees and encouraging them to strive for excellence for the good of the whole company.
In particular, incentives are often used in advance of goals being achieved – allowing employees to work towards a reward that is directly related to the efforts they put in.
Additionally, incentives usually have some sort of structure or plan behind them – which helps ensure that all employees are rewarded fairly based on their individual contributions.
Milestones and expectations
In addition, bonuses are generally a one-time payment, while incentives can be structured over time to increase motivation. This leads to fewer disgruntled employees, thus making the workplace culture a more settled one.
For example, an incentive program may set quarterly or yearly targets with rewards when these targets are achieved.
Creates a common goal
Furthermore, offering incentives can help foster an atmosphere of teamwork amongst colleagues as everyone strives together towards a common goal.
Incentives vs Bonuses
Overall, providing meaningful incentives can be much more effective than simply giving out bonuses, as it encourages employees to work harder and understand the direct correlation between their efforts and rewards. This in turn can help ensure that employees stay happy and motivated in their roles.
Incentives and bonuses both have the potential to increase employee satisfaction and drive productivity within an organization; however, it is important to understand how each type of reward works to ensure that they are chosen wisely and effectively implemented.
In general terms, each is largely rewarded based on either the past or the future
Bonuses are based on past performance
A bonus is typically given after the fact or upon short notice.
The company may decide to use bonuses as a reward but often these are a surprise based on meeting additionally installed targets.
So bonuses are often a spontaneous reward, such as outstanding service to a customer that day, or offered to gain a short-term goal …like the sales person who gains the most sales in one day for example.
Incentives are based on future performance
Incentives, on the other hand, are designed to encourage long-term performance by providing rewards that can be earned over time.
Incentives may include bonus payments, but they also typically involve recognition or awards for working hard and going the extra mile.
Incentives are ongoing throughout the year and reward incremental progress toward set targets.
This helps to ensure that employees remain motivated even when goals have not yet been met, as they can still reach for further laid-out goals in the future.
Bonuses act as a reward or recognition for someone’s past performance, while incentives can be used to encourage and motivate people to work harder or smarter in the future.
Which works better? A bonus or an incentive?
Whether you should typically adopt a bonus-based environment, or an incentive-based environment depends on the objectives you have.
Bonuses, when given wisely and fairly, are a good way to reward employees for their extra effort. While incentives can be used to motivate and inspire staff toward greater heights.
That said, both bonuses and incentives can be used in tandem – but when bonuses are given without any reason or recognition, they’re nice to have, but they’re likely to be less effective than incentives that come with praise and shared goals and a person, or team sense of achievement.
Similarly, if too many incentives are given out at once it could lead to complacency rather than motivation.
Ultimately, it’s important to keep in mind that rewards aren’t just about money – meaningful feedback and recognition will make employees feel appreciated and valued, which is essential for building strong relationships between employers and employees.
Difference between a bonus and an incentive – Next steps
In conclusion, incentives can be an effective tool for businesses to use when rewarding their staff. By setting out clear goals with corresponding rewards, companies can show appreciation for their employee’s efforts.
Before moving forward with any of these options, you should seek advice from our professionals, indeed, perhaps there is a tailor-made solution for your company that you didn’t know about. So take a quick 15-minute demonstration, or simply contact us now to learn more.