The compensation equation: the pay bonus and performance breakdown employers need

July 8, 2025

Sara Maginn Pacella

Happy employees are effective and engaged employees. More employers are looking at ways to remain competitive and attract and retain top-tier talent, and bonus programs have proven to be a valuable motivational tool. Before selecting an incentive pay program and related performance incentives for staff, it’s helpful to understand the options available to ensure you have chosen the right fit for your organization.

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Adam Nalepa is a Senior Business Advisor with BDC’s Advisory Services who works with entrepreneurs on human resources initiatives. Nalepa says, “Bonuses help get employees to drive toward the right direction performance-wise, so that, as a company, you can meet your goals.”

For this article, we focus on financial bonus programs.

What is a pay bonus?

Simply put, a bonus is a financial reward for staff that’s given in addition to regular compensation (salary or hourly wages). Bonuses are created as a reward for effective employees to increase productivity. Bonuses can be discretionary (not guaranteed) or non-discretionary (written into your employment contract).

Examples of pay bonuses include:

Signing bonuses for new employees;
Retention bonuses for employees during times of organizational change or economic uncertainty;
Holiday bonuses;
Referral bonuses for employees who have recommended a successful candidate who joined the organization; and
Milestone bonuses or anniversaries (given for completing a special project or after a certain number of years of tenure).

” Bonuses help get employees to drive toward the right direction performance-wise, so that, as a company, you can meet your goals. ”

What are performance bonuses?

Often tied to annual performance appraisals, performance bonuses are lump sum financial rewards given after an individual or team reaches predetermined targets and achieves specific goals. In addition to annual performances, some companies offer bi-annual, quarterly or even monthly performance-based bonuses. Some companies offer bonuses for critical sales quarters to drive performance when needed the most and not for the rest of the year.

Performance bonuses can be individual or team-based and may be tied to a variety of metrics, including:

Sales (when sales employees earn a percentage of their sales as commissions);
Outstanding performance, usually outside of regular defined duties (given as one-time, spontaneous financial rewards, or spot bonuses);
Employee of the month or quarter;
Productivity;
Cost saving;
Achievement of specific, predefined metrics or objectives; and
Customer and key stakeholder satisfaction.

What is a performance score threshold, and how does it impact performance bonus amounts?

A performance bonus threshold is the level of performance required for someone to attain their bonus. Defining a performance score threshold for a bonus can be based on overall performance level (the lowest performance an individual or team must meet or exceed and still receive a portion of their bonus) and employee eligibility (which roles qualify to receive bonuses). Some organizations have rules about how long a person needs to have worked within a company to qualify for their bonuses (i.e., employees still on probation may not receive a bonus). All information, including the fine print of bonus allotment, must be communicated with employees regularly to avoid any misunderstanding surrounding bonuses awarded.

Consistency is key

While bonuses can be both discretionary and non-discretionary, the consistent implementation of these programs across an organization is critical to its success. If employees feel bonuses are being implemented differently by some managers or across different departments, it may demotivate employees, which is the opposite intent of a bonus program. Because discretionary bonuses are not predictable, they’re more likely to be perceived as unfair and can lead to resentment among staff.

If an organization has bonus maximums, even for those who have exceeded their KPIs as a part of their bonus programs, these should be outlined in all communications with staff about bonus programs.

Can a company offer both discretionary pay bonuses and performance bonuses?

Yes, organizations can offer pay and performance bonuses as distinct ways to reward employees for different types of contributions. As best practice, employers must ensure that both programs are distinct, fair and equitable among all employees and that the bonus criteria and reasoning for awarding specific pay bonuses are well-articulated to avoid any miscommunication.

What about bonus taxation?

Pay bonuses in Canada require the deduction of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, unless the maximum threshold for the year has already been reached. Income tax must also be deducted from any bonus-related payments.

Conclusion

Bonuses are meant to motivate, so they should be well-thought-out and communicated to staff to achieve the desired results. No matter what type of bonus program you offer, Nalepa reiterates: “The key is to use bonuses to promote the right behaviours and help the business move toward its objectives.”

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