Calculating Prorated Bonuses and 13th Month Bonuses

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.

When to Make One-Time Prorated Bonus Payments

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:

• Employee new hire start date – employees start jobs throughout the year, which means that many employees start in the middle of a performance period. In these cases, they may only be eligible for a partial bonus payout, based on their new hire start date.
• Employee termination date – an employee that leaves before the end of a performance period may also be eligible for a prorated bonus. Employees that are terminated for cause typically lose their bonus eligibility. However, employees can also become disabled, retire, or suffer other personal crises that force them to leave work voluntarily during the performance period. You may choose to make a goodwill gesture to pay prorated bonuses in these situations, assuming that the employee was active for a significant portion of the performance period.

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.

Calculating a Prorated Bonus for a New Hire

• Calculate the number of days (including weekends and holidays) the employee was eligible during the period:

Last Date of Performance Period - First Date of Eligibility = n Days

Example:

12/31/19 - 9/30/19 = 92 days

• Divide the number of days calculated above by the total number of days in the performance period to create an adjustment factor.

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

• Multiply the adjustment factor by the full bonus payout for the performance period.

Example:

Assume a full year bonus payout of $20,000.

0.252 x $20,000 = $5,040.

Calculating a Prorated Bonus for an Early Termination

• Calculate the number of days the employee was eligible during the period:

Termination Date - Start Date of Performance Period = n Days

Example:

6/30/19 - 1/1/19 = 180 days

• Divide the number of days calculated above by the total number of days in the performance period to create an adjustment factor

Example:

Assume a performance period of one year or 365 days.

180 / 365 = 0.493

• Multiply the adjustment factor by the full bonus payout for the performance period.

Example:

Assume a full year bonus payout of $20,000.

0.493 x $20,000 = $9,860.

Another Benefit: 13^th Month Bonuses

It is tradition and sometimes legally mandated to pay a 13^th 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, 13^th month bonuses are calculated as 1/12^th 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 13^th 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, 13^th 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 13^th 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 13^th month payments correctly.