Whether you hand out year-end bonuses or give them to employees throughout the year, here are three things to think about before breaking out the company checkbook. 

The following is recommended by HR Consultant Carl Greenberg:

1. Create a bonus system that reflects an individual's actual contribution to the company. What you want to avoid is a culture of entitlement in which employees expect to receive a bonus every year, regardless of their performance, Greenberg says. To prevent such a culture from developing, employers must give out bonuses that reflect how much an employee's actually contributing. This will keep employees motivated to boost their performance.
2. Discuss performance when handing out bonuses. To reassure employees that you're distributing bonus payments fairly, sit down with employees (preferably one on one) and explain how you arrived at the bonus amount. It's critical that you do this with low performers - if they get a smaller slice (or no slice at all) of the bonus pie. This is when to send messages like, "Here's why you didn't get a bonus..." and "Here's what you can do next year to get one ... ".
3. Keep non-cash bonuses/rewards in the fold. These are still effective motivators. Greenberg strongly advices that company leaders hand write high performers "thank you" notes. The notes should explain how much the company's top brass appreciates these employees' hard work. For added impact, mail these notes to employees' homes, where the words of appreciation can be shared with family members.

Structuring bonuses

Yes, it's OK to give low performers very little in the way of bonuses, says Greenberg. In fact, he recommends that the bottom 10% of performers get no bonus pay whatsoever.

Instead, he advises employers to give that money to the top 5% to 10% of the best employees in the way of significantly bigger bonuses than those given to average performers.