Meaning of Cash Bonus
A lump sum of money awarded to an employee, either occasionally or periodically, for good performance. A cash bonus for better-than-expected performance may be awarded to an individual, division or the entire organization, depending on the level at which performance targets were exceeded. While some companies pay out quarterly bonuses, the majority give cash bonuses to their employees once a year. This annual bonus is generally paid at the end of the year in order to help employees with the higher levels of household expenses during the holiday season. Cash bonuses can vary greatly in size, from a few hundred dollars, to millions for top performers in highly-paid professions like investment banking and trading.
Breaking Down Cash Bonus
As the level of cash bonuses is primarily determined by the profitability of an organization, they can fluctuate significantly from one year to the next, depending on how well the economy is doing. Cash bonuses can reach record levels during economic booms, and may dwindle or be eliminated altogether during recessionary periods.
Cash bonuses can have a significant short-term impact on the local economy in areas where the average bonus level is high.
For example, in financial centers like New York and London, high cash bonuses that are paid when the economy is booming can lead to a spike in demand for luxury items such as sports cars.
Research regarding the impact of cash bonuses on employee productivity has produced mixed results. Some researchers suggest that cash bonuses do little to improve employee satisfaction and performance. However, a 2013 report by researchers at Harvard indicated that workers who were awarded cash bonuses were more productive than those who received a raise, even though they were earning the same amount. The researchers concluded that employees who get raises simply assume that the higher salary is the new going rate for their services. But workers who receive cash bonuses are more likely to view them as discretionary rather than mandatory payments, and therefore reciprocate the gesture by working harder.
Reversionary Bonus
1. Simple Reversionary bonus (SRB): This type of bonus is calculated on the sum assured only. This bonus is declared annually and is accrued to be paid out at the time of a claim or maturity.
2. Compound Reversionary Bonus (CRB): CRB is calculated as a percentage of the sum assured and all previously accrued bonuses. The bonus of each year is added to the sum assured and the next years bonus is calculated on the enhanced amount.
Example: Rahul Khanna has two participating policies of Rs 5,00,000 each. Lets assume that on the first policy he gets a bonus using the simple revisionary method and on the second policy he gets a bonus using the compound revisionary method.
The SRB declared on the policy is Rs 25 per 1,000 of sum assured, while CRB declared is 3 per cent throughout the policy term. As seen from the table above, the CRB to be accrued at the end of the 10th year is much higher, as compared to the SRB of the same year.