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Should I offer a bonus or raise at work?

Recognising and rewarding hard work, dedication and performance is essential towards employee engagement and maintaining a strong, motivated team, but you may be unsure of how exactly you should be rewarding them. While giving a raise at work is of course a great showing of appreciation, there may be some cases where awarding a bonus is more appropriate, and perhaps more a sustainable decision for your business.

How do bonuses work?

Typically, a work bonus is awarded to employees based on their individual performance over a certain period or for a certain project. Bonuses are generally not guaranteed, and their distribution depends on reaching particular targets – usually revenue-based targets.

In some cases, the rewarding of bonuses won’t be tied to any specific performance goals or metrics, rather the employer will simply decide at their discretion who deserves to receive a work bonus.

Bonuses act as an incentive to employees, encouraging them to work hard by offering potential financial rewards. They’re often offered as a perk in competitive industries with the idea that if you work hard and do well, the company does well, and you should be recognised for your positive impact.

There are a few different ways bonuses can be distributed, below are the most common:

  • A work bonus might come in the form of an annual bonus, where bonuses are distributed based on performance over the year.

  • It may be a spot bonus, where an employee is given a one-off reward for their contributions to a particular piece of work.

  • It could be a signing bonus that’s awarded to employees when they take on a new position.

  • Many companies offer referral bonuses to employees who refer strong candidates to the organisation.

  • A retention bonus may be offered as an incentive for an employee to stay with the company, generally during a merger, acquisition or company restructure.

  • Holiday bonuses are similar to annual bonuses, though they may not be tied to any specific quotas or targets and instead are simply an act of kindness and appreciation in the holiday season.

What is a good bonus percentage?

A bonus is typically calculated as a percentage of the employee’s salary. On average, decent bonuses in Australia range between 6% and 10% of the annual wage. Certain industries may offer larger bonuses, like mining for example, due to the risks involved with the job and the high profitability of the industry. Bonus amounts may also differ depending on seniority – a bonus percentage might grow each year an employee remains with the company, for instance.

High level executives might receive large bonuses, sometimes a third or even half of their salary. You might opt to let your employees negotiate their work bonus and the targets they must reach to obtain it.

Bonuses are classified by the ATO the same way wages are, meaning they’re liable for payroll tax.

Giving a raise at work

From a business perspective, bonuses probably seem like the better option because they’re a one-time cost that is usually only needed when the business is performing well. However, your goal is to show your employee how much you value their work, and in their view, they may feel a raise in salary would be more appropriate for their contributions, particularly if they’ve worked for you for some time.

Offering raises instead of bonuses is a long-term cost, which could mean greater financial risk – it’s highly unlikely that you’ll ever revert your employee back to their original salary – once you give a raise, it’ll only really go up from there. You don’t need to commit to giving your employee a raise every year, but giving them consistently and then suddenly stopping might leave your employees dissatisfied.  If you’re unable or unwilling to offer a raise for a long period of time, you may risk losing a valuable worker.

What is a good raise percentage?

Typical raise rates in Australia differ depending on industry, but on average the average annual raise is a 6% salary increase. Like bonuses, this will also differ depending on experience. Senior level workers and employees in managerial positions can sometimes see raises increases of 10-15%.

Of course, if you’re doing well and can afford to do so, offering both raises and bonuses would be favourable. If you have to choose one or the other, consider your financial performance and targets and decide whether ongoing, smaller increases in wages are more viable than one-off, larger bonuses. What’s best for you will depend on the nature of your business and team.

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