Written by Sarah Reynolds
April 29, 2019
There are several reasons why you may wish to prorate an employee’s bonus – that’s is, pay them just a portion of the total amount based on the period of time they’ve been with your company.
Below, we’ll discuss when you can most effectively utilize a prorated bonus program and how to calculate the right prorated payout amounts for your employees.
Knowing how to calculate a prorated bonus and when to make prorated bonus payments can vary based on when an employee was hired or terminated. It can also vary based on your company’s pay policy, so be sure to check your HR and compensation documentation to see if you have specific calculation instructions. Common reasons for prorating include:
Some organizations require a waiting period before an employee becomes bonus eligible, but may still want to make a prorated bonus payment to an employee that reaches eligibility and performs well for a significant portion of the performance period.
Last Date of Performance Period - First Date of Eligibility = n Days
Example:
12/31/19 - 9/30/19 = 92 days
Example:
Assuming a performance period of one year or 365 days. (Some performance programs may pay out on a quarterly basis, so be sure to make the denominator match your assessment period)
92 / 365 = 0.252
Example:
Assume a full year bonus payout of $20,000.
0.252 x $20,000 = $5,040.
Termination Date - Start Date of Performance Period = n Days
Example:
6/30/19 - 1/1/19 = 180 days
Example:
Assume a performance period of one year or 365 days.
180 / 365 = 0.493
Example:
Assume a full year bonus payout of $20,000.
0.493 x $20,000 = $9,860.
It is tradition and sometimes legally mandated to pay a 13th month bonus to employees in many countries outside of the United States, especially in Asia and Latin America. Moreover, many countries prescribe a specific formula for calculating these bonuses and specify rules for when to pay these bonuses.
Generally, 13th month bonuses are calculated as 1/12th of an employee's pay in the preceding 12 months. In these cases, the best practice is simply to divide the target annual guaranteed earnings by 13 and save the 13th payment for when the bonus is due. This in effect reduces salary but maintains the target total cash compensation.
However, laws do vary by country. In Argentina for example, 13th month bonuses must be based on the highest month’s salary in the preceding six months, with half paid in June and half paid in December.
While it may be unusual to pay prorated or 13th month bonuses in your organization, situations may arise where your company needs to do so. Consult employment law in each of the countries where your company does business to ensure that your organization is making these 13th month payments correctly.
Download our white paper to further understand how organizations across the country are using market data, internal analytics, and strategic communication to establish an equitable pay structure.