Glossary
Performance bonus
Meaning & Definition
A performance bonus is a supplemental remuneration paid to an employee, depending on personal, team or organizational performance. This usually depends on predetermined goals, accomplishments, productivity and business outcomes and is paid separately from the basic salary. The quantum and eligibility of performance bonus may vary in accordance with the company policies, employment terms and relevant statutory provisions.
Importance of Performance Bonus
- Recognizes employees for meeting set performance targets.
- Helps in increasing productivity and achievement of goals.
- Ties personal contribution with organizational outcomes.
- Helps in motivating employees.
- Serves as a tool for compensation to employees for their performance.
- Helps in attracting and retaining employees, if properly designed.
Legal Considerations
- The manner of treatment of performance bonus would depend on its nature and terms of award. In case the payment is treated as “bonus” under the Payment of Bonus Act, 1965, then all statutory eligibility criteria and payment terms will have to be complied with.
- Companies are supposed to spell out the criteria, eligibility, calculation and payment of such bonuses through employment contracts or HR Policies. Income tax and payroll aspects will also have to be taken care of.
