How to Calculate Your Employee Year End Bonus

Dias Marendra
year end bonus

Aside from payroll, there is another thing that your employee waiting for, which is a year-end bonus. Normally, a bonus is not regulated by the government. It was given to an employee of a company based on the agreement upon recruitment.

Furthermore, bonuses are usually given when the company is gaining profits. When the company is unable to book any profits, then the company will not be giving any year-end bonus for their employees.

Regarding the bonus amount, every company has their own policies. Usually, the bonuses will be determined by the service time factor, performance, position, and employee attendance.

So, what is the best way to calculate the year-end bonuses for your employees? There are two methods that you can try:

Year-End bonus calculation with the percentage system

The percentage system is highly dependant on the employee’s performance. The better their performance and their service time are, the more bonus they will receive.

The percentage number can vary from one company to the other. The example we provided below is not absolute, so your HR team can decide the best proportion for each factor.

Employee service time

For new employees (under 1 year service time), then this factor will be counted with pro-rate. For those who work longer in the company, then the amount can be determined by percentage.

  • 1 – 2 years: 100%
  • 3 – 4 years: 110%
  • 5 – 6 years: 120%
  • 7 – 8 years: 130%
  • 9 – 10 years: 140%
  • > 10 years: 150%

Position

You can include this aspect to determine the bonus amount received by your employees. Feel free to adjust the numbers to your likings:

  • Operator: 80%
  • Foreman: 90%
  • Supervisor: 100%
  • Superintendant: 110%
  • Manager: 120%

Departments

Every department in a company has different workloads. This can be included to determine the bonus calculation.

  • Productions (or the ones related to it): 120%
  • Non-productions: 110%
  • Supporting: 100%

Warnings

When the other factors can be considered as rewards for your employee’s hard work, this one is a punishment for those who broke the company rules. Employees that received warning letters will get less amount of bonuses compared to those who don’t.

  • No warning letter: 100%
  • 1st warning: 90%
  • 2nd warning: 80%
  • 3rd warning: 70%
  • 3 months suspension: 60%
  • 6 months suspension: 50%

The percentage and punishment types can be adjusted to your company policies. Choose which one is appropriate for your company.

After deciding what to calculate, the next thing you have to do is calculate your employees’ bonuses based on those factors. Here is the formula:

Bonus = (salary x service time x position x department) x warnings

Let’s take Andy as an example. He has a $5000 salary per month. He has been working in your company for 5 years and managed to reach a supervisor position in the production department. Sadly, a while ago he got 1st warning due to breaking the company rules.

So, how much the bonus that Andy will get this year? Let’s calculate them:

Andy’s Bonus = (5.000 x 100% x 120% x 120%) x 90% = $ 6.480

Pretty simple, right?

Revenue sharing

Aside from percentage, there are also some companies that share their revenue with their employees. The employee’s hard work is being paid with bonuses.

To make this method work, there should be profits to be shared. How big the bonuses are highly dependant on how much the profit earned by the company during a certain period.

Usually, the company shares 10% of the total profit earned for every employee in the company. But there are also companies that only share 7,5%, 5%, or even 2% of the total revenue.

The bonus’ size is determined by how often the company shares its revenue. 10% means once a year, while 2,5% is the best option if you share the profits quarterly. Here’s the formula:

Bonus = (total profit x percentage)/ number of employees

For this method, let’s take a look at Christie’s company. Her company shares a 5% total profit with their employee. There are 50 employees working in the company. This year, they achieved 10 billion in profits. So, Christie and her colleagues will get:

Bonus = (10.000.000.000 x 5%)/50 = $ 10.000.000

Conclusion

Two methods on how to calculate the year-end bonus above have its own advantages and disadvantages. The second method is easier, but it’s kind of unfair if we look deeper into each employee’s performance. You can work leisurely and still get the same bonus amount with those that work diligently.

The first method is harder. Even harder when you do the calculation manually and your company has hundreds or even thousands of employees. That’s why you need HRM software to make the job easier.

Not only make the bonuses calculation easier, but the HRM system can also help you to automate tax calculation, payroll distributions, and many more. Learn more about the best HRM system here.

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