All employees are familiar with the terms bonus and incentives. Sometimes we often get confused with these, because both bonus and incentive are given as an additional to the salary. A bonus is the decision to pay one, a group or all employees, based on criteria decided by management to reward past achievements, such as reaching a specific profit or target, or some important milestones for the organization.
Incentive pay is the payment that is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan.
Know the basic difference between a bonus and incentive:
1. Basic difference
The bonus is granted to a person after a particular task or project has been completed by the person, an incentive is offered at the onset. Incentives will be mentioned to the employee before he started working.
2. Bonus is surprising
A bonus is usually given as a surprise. Incentives have no surprise factor. Incentives are provided as a motivation to the workforce to complete more tasks and build loyalty to the organization. An incentive is guaranteed to the employees if they complete the task. The bonus is provided at random or on the spot that the management of a firm decides to give a bonus to their employees for accomplishing the task.Salary Slip: 8 Important Things Salaried Individuals Must Know
3. Forward-looking and backward looking
The incentive is an additional pay (above and beyond the base salary or wage) awarded to an employee, such as stock options or a contingent bonus plan, that is forward looking. The bonus is may be in the form of a cash award or other items of value, such as stock, based on tasks achieved. Bonus plans are backward looking in nature.
4. Bonus in cash form, Incentives not
Incentives are any form of variable payment tied to performance. The payment may be a monetary award, like cash or equity, or a non-monetary award, such as merchandise or travel. In bonus, payments may be made in cash, shares, share options or other items of value. In the context of sales compensation, a defined, pre-established amount of money to be earned for achieving a specified performance goal.
5. An incentive in the form of bonus
An incentive can be a bonus, but a bonus cannot serve as an incentive. It is because the incentive is forward looking and encourages the employees to perform a given task well, where as a bonus is something which is only handed out once a task has been fulfilled and the boss thinks that individuals have outdone themselves.