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Revealed: The difference between a performance and a production bonus

by , 08 January 2014
One of the issues you must deal with at the beginning of a brand new year is bonuses. If you overlook this, you'll have major problems come the end of the year. Don't take that risk! Read on to discover the difference between a performance bonus and a production bonus.

Think there's no distinction between a performance and production bonus?

You're wrong.

The difference between a performance and a production bonus explained

The performance bonus: According to labour experts André Claassen and Jan du Toit of the Labour Guide, companies normally pay a performance bonus for good performance, and must base this on a percentage of the employee's salary or wages.

They then usually pay this bonus as a lump sum to a department and split up in equal amounts to each employee in that department.

The experts say this applies in the situation where all employees in a particular department are collectively responsible for above-average performance.

The performance must be measured against laid down company standards, but you wouldn't only pay the bonus for the occasional work done which exceeds company standards, but for consistent work exceeding company standards.

This means that line managers and even supervisors have to closely monitor performance and keep accurate records.

If the results achieved by a department depend entirely on the collective effort of all employees in the department, you can calculate the amount of the bonus on the basis of a percentage of profits achieved over and above what was budgeted for or as a percentage of the total profits generated by the department and so on. Just make sure the method of calculation is fair.

What's a production bonus?

On the other hand, the production bonus is based, not on performance measured against company standards, but rather on production measured against targets.  Measurement is also based on quality of production, say the experts at the Labour Guide.

This means if your company has set a target for one particular employee or, for a particular department to produce 100 widgets per hour, and the employee or department consistently produce 130 widgets per hour, then a production bonus would be justified.

The experts go on to say that similarly, if the company rule is that a rejection rate of 5% is acceptable, but the department consistently achieves a rejection rate of only 1%, then a production bonus would be in order.

Important: The payment or non-payment of bonuses is totally up to you as an employer.

This means if you don't currently pay bonuses and wish to continue doing so, you can without fear of being accused of unfair labour practice. It's advisable that you state this in your employee's contract so he knows you don't pay bonuses.

BUT, if you decide to pay bonuses, make sure you meet these legal obligations.

Two legal obligations you must meet if your pay bonuses.

The Practical Guide to Human Resources Management says you must:

  • Record, in writing, the details of all payments your employee is entitled to; and
  • Clearly define details about the type of bonus and when you'll pay it in your employment contracts.

If you decide to pay either a performance or production bonus, be fair and upfront with your employees to avoid legal disputes.

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