Understanding Bonus Calculations: Can Someone Explain the Formula and Its Purpose?

Hi! Can anyone tell me how the bonus is calculated and provide the formula, or if possible, a simple illustration for understanding its purpose? I would be thankful for this kind act.

Vinay,

There are many ways of doing it. The most popular are: 1) basic salary-based (Christmas and mid-year bonuses) and 2) percentage of basic salary (productivity-based). Salary-based bonuses range from half a month BS to 3 months BS. Percentage-based bonuses range from a low of 0% to 300% depending on the program and budget.

In our part of the world, bonuses are annually given by employers towards mid-year and at the end of the year (usually Christmas and from 0.5 BS to 3.0 BS). This is a way of sharing a company's profits with its employees.

In Japan, they also have it salary-based and given twice (Summer & Winter, both 3-months BS). US companies prefer productivity and performance-based bonuses, although given also at the same time of the year (midyear or Christmas time).

Best wishes.

Regards, Ed Llarena, Jr. Managing Partner Emilla Consulting

Sometimes it is appropriate to pay the same bonus to all employees. The likes of Semco use this approach rather than a percentage of salary approach, which will inevitably favor high earners. Paying everyone the same actual amount as a bonus is more equitable. So, if you were sharing 20% of the profits ($1 million) among 100 workers, each would get $2,000.

Col
http://colbrown.co.uk

Col, there are merits and demerits in paying the same amount of bonus to employees. High performers tend to get demotivated when they receive the same amount as ordinary and poor performers.

Best strategy for bonus distribution

The best strategy that I have seen implemented by companies is as follows:

1. Same baseline amount for all.
2. Add a premium for high performers (performance appraisal based).
3. Use the inflation rate as a factor in determining the minimum bonus to restore employees' purchasing power.

Best wishes,
Ed Llarena, Jr.
Managing Partner
Emilla Consulting