How To Prorate Annual Bonus And Performance Bonus For Your New Employees

Aside from monthly wages, most employers also pay out annual and performance bonuses to reward employees for their good work throughout the year. However, sometimes when it’s the time for bonus payouts, there may be new hires who have not worked throughout the entire year. One way to maintain parity is to prorate the bonuses for these new employees.

Read Also: How To Calculate Leave Encashment Or Salary-In-Lieu Of Notice Period For Your Employees

Is It A Must To Pay Annual Or Performance Bonuses To New Employees?

As with other variable payments, bonuses are not compulsory unless stated in the employment contract. This means that employers have the freedom to decide if new employees are eligible for annual and performance bonuses.

Employers can choose to only give out bonuses to new hires who have passed their probation or a threshold period of service (i.e., after 3 or 6 months) or even decide that a minimum year of service is required before a new hire is eligible for bonuses. This should be stated in the employment contract.

While payment depends on the employment contract or collective agreement, employers are still encouraged to give out bonuses to reward employees for their contributions to the company’s performance.

Read Also: Annual Wage Supplement (AWS), Annual Variable Component (AVC), Monthly Variable Component (MVC): Here’s How The Flexible Wage System Works

How To Calculate And Prorate Annual Bonus Or Performance Bonus?

Whether it is to increase staff morale or improve retention, employers can decide to pay out bonuses to new employees. However, it may not be fair to existing employees to pay out the same amount of bonus to these new hires who may not have contributed as much given their shorter tenure.

Thus, a common way to determine the amount of bonus to give to new employees is by prorating the bonus by the length of their service.

To do so, we need to find out the ratio of the length of service for the new employee compared to an employee who has worked for an entire year.

For this calculation, we are assuming that period for the bonus payout is the same as the calendar year.

Simple Calculation By Using Days, Weeks Or Months

Let’s assume that the employee joined in the middle of the year on 15 July 2023 and the bonus is to be paid for the period of 1 January 2023 to 31 December 2023. The annual bonus for a full year of service is $5,000

The new employee’s eligible period will be from 15 July 2023, or 5.5 months, 24.14 weeks or 169 days.

Depending on whether the employer calculates by days, weeks or months, the proration will be slightly different:

Calculation by months: 5.5 months / 12 months x $5,000 = $2,291.67

Calculation by weeks: 24.14 weeks / 52 weeks x $5,000 = $2,321.15

Calculation by days: 169 days / 365 days x $5,000 = $2,315.07

As can be seen, the simplest calculation by months results in a lower prorated amount. This is because the number of days in a month is not the same for every month. In contrast, the calculation by weeks results in a slightly higher prorated amount as the number of days in 2023 is 365 days or 52.14 weeks.

Read Also: How Much Employers Have To Pay Employees For Working On A Public Holiday?

Calculation By Working Days

Given the inconsistencies in calculating by the simple ratio of days, weeks or months, is there a better method for prorating bonuses.

While the Ministry of Manpower (MOM) does not prescribe a formula for variable pay (including bonuses), they do have a formula for an incomplete month of work:

Source: MOM

The number of days the employee worked includes the number of days worked in the month and the number of public holidays, paid hospitalisation/sick leave or approved entitled leave.

We can also apply this principle of working days to prorating bonuses.

Assuming the same new employee is on a 5-day work week, we can compute the calculations by looking at the table of working days per month for 2022 provided by MOM. There are 260 working days in 2023 for 5-day work week.

Calculation by working days: 121 days worked / 260 working days * $5,000 = $2,326.92

If the employee is on a 6-day work week, this will be:

Calculation by working days: 146 days worked / 313 working days *$5,000 = $2,332.27

As the calculation by working days is based on the actual number of days worked and the working days of the year, it is less subject to the variability of the calendar year (including leap years). However, in a pinch, calculating by weeks (i.e., dividing by 52 weeks) gives the closest results to calculating by working days.

Prorating Annual And Performance Bonuses May Also Apply For Exiting Employees

In general, bonuses only apply for employees who are in service during the time of payout. However, there may be occasions where the employers may choose to give out the bonus as a goodwill gesture. In these cases, the prorating of bonus is the same, except using the date of exit to determine the bonus eligibility period.

Employers also need to keep in mind that bonuses are considered Additional Wage (AW) and CPF is payable on them.

Read Also: 10 Types Of Employee Payments (Apart From Salary) That Businesses Need To Pay CPF For

This article was first published on 14 November 2022 and has been updated with the latest information.

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