How Bonuses Work: What They Are And Examples

By Amanda Covaleski - Dec. 10, 2020
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Everyone loves hearing that they’re getting a bonus. Who doesn’t want a little extra money in their pocket for a job well done? Bonuses are great not just because they give you a little income boost but because they’re also a sign that you’re doing something right.

The only downside to getting a bonus is that they can be confusing. Depending on your company, there might be certain requirements you need to meet in order to be eligible for a bonus or some caveat in how or when you’ll be getting that bonus. While bonuses are definitely a good thing, you can’t forget about some of the issues that can pop up while dealing with them.

So what are bonuses, when can you get them, and how are they paid out? These are just a few of the questions we’re going to tackle. Read through our guide and you’ll be perfectly prepared for your bonus whenever it comes.

Definition and Examples of Bonus Pay

What exactly does getting a bonus mean? If you’re getting a bonus, it means you’re getting extra pay outside of your agreed upon salary. They’re not like your regular pay, which comes at regular intervals in a standard amount. Bonuses are like rewards that you’ll get in addition to your base salary, but they typically don’t repeat like your pay does.

Bonuses vary from company to company, so check with your boss or your human resources department to be sure. Typically, bonuses will be given as rewards for completing a big project or as a show of appreciation for the work you’ve done. Most bonuses are discretionary, and managers can choose who does or doesn’t qualify for one.

Usually, bonuses are treated as rewards for employees who go above and beyond to support the company or lead it in new directions. If you’re helping the company meet its goals or exceeding your own, especially in revenue-generating roles, you might be eligible for a bonus. The thinking goes that if you know there’s a monetary reward for your work on top of your existing salary, you’ll be more motivated to reach a larger company goal.

Since bonuses depend on the company’s health, you could expect bonuses if your company is doing well and making a profit. Companies don’t always have the budget for bonuses since they’re outside of the standard salaries they pay. If you know that your company is doing extra well, there might be a bonus in your future.

Bonuses can also be a good way for companies to boost morale. When an office hears that there will be bonuses given out, they might be more inclined to finish up that big project or show some big sales numbers. Bonuses encourage employees to meet their goals and work together to make the company stronger.

One thing to be clear about is that bonuses are different from commissions. If you’re in a sales position or one where you get extra pay based on what you sell or deals you make, you probably receive a commission. For example, if you sign a paid contract with a client and earn 5% of that amount, you’re getting a 5% commission.

Bonuses, on the other hand, are independent of specific percentage amounts. Even if you’re being rewarded for your performance for both of these pay schemes, bonuses depend more on the company’s overall performance. If the company does extraordinary well, they have extra money to give bonuses to employees, but companies always have the money to give out commission.

What Is Bonus Pay?

Bonus pay is exactly what it sounds like – extra pay on top of your salary. There are many ways to receive it and the amounts you can expect it in.

Depending on your position, your pre-agreed salary, the company’s health, and your role in its growth, you can expect a huge range in what amount you’ll be offered in bonuses. If you lead a team that was key in negotiating a valuable contract or bringing a huge project to completion, you’ll probably be offered more money than if you were a supporting member of that same team.

But, there are ways to make sure you’re getting a fair bonus. Sometimes you’ll know how bonuses work at a company when you sign your job contract. You can make sure at that time that all of your bonuses will be fair and you have a clear understanding of how they work.

In other situations where you have the upper hand, you can try to negotiate your bonus. While you can negotiate a bonus, it isn’t always a good idea to do so. If you’re in negotiations for the job before joining a company, you can negotiate your signing bonus, but other times you should stick with what the company gives you.

Sometimes when you sign a job contract and join a company, you can get a signing bonus to welcome you. In that case, you could and should negotiate your bonus. Think about negotiating if you have a few companies interested in offering you a position, the hiring manager approached you for the job, you’re taking a pay cut at this new job, you’re relocating for the job, or you’re moving to a smaller company or start-up and taking a risk.

How Does Bonus Pay Work?

Since bonuses are usually discretionary, there’s no one-size-fits-all for them. Companies do them differently, but you can expect that a bonus will be extra compensation for a job well done no matter where you work.

Discretionary bonuses have a positive and a negative. Since they’re up to a manager or director to give out, you probably have a good enough relationship with the person in charge of rewarding bonuses to know how good your work has been or approach them to discuss bonuses. You can have an open conversation with them to discuss your performance and the terms of the bonuses.

On the other hand, companies are not required to give out bonuses. Since they’re not part of your defined salary, there’s no obligation for a company to give them out. This applies both in general and specific cases. If a company doesn’t have the money to give out bonuses, then they won’t.

If they do have the money, they don’t have to split it among employees equally or give bonuses to everyone. It’s completely up to the discretion of whoever is deciding, so it’s possible that you won’t get a bonus even if some of your other coworkers do.

Types of Bonus Payments

Bonuses can be given out in several ways for a number of reasons. It’s not always clear what kind of bonus you’re getting and how you’ll be paid, so here’s a quick list of the most common bonuses that companies give out:

  • Performance-based. There are a few ways companies can reward good performance and pay out bonuses.

    • Salary-based. Sometimes companies give out performance bonuses based on how much money you already make. People at the company with higher salaries are eligible for higher bonuses. These can be determined at the discretion of the company, or they can be attached to a fixed rate, like people who make over $100,000 a year get a 10% bonus, but below that, it’s 5%.

    • Individual-based. Companies can decide to give out performance bonuses based on individual performance. These are bonuses for meeting your goals or if your work leads to a significant improvement at the company. This kind of bonus is usually more about your soft skills than any concrete goal you reach, but that isn’t always the case.

    • Company-based. If a company exceeds its goals, it might give out bonuses to its employees as a reward. Pay attention to how well your company is doing, which sales targets it is or isn’t meeting, and similar data so you can predict if you’ll be getting a bonus.

  • Annual bonus. People also call annual bonuses profit sharing since they depend on how well a company is doing. Sometimes companies will divide up extra profit and distribute it among employees each year. The amount you receive each year will change depending on how the company performed.

    This bonus is popular for motivating employees since you know you’ll get extra money at the end of the year if you can work to pull good numbers throughout the entire year.

  • Signing bonus. Like we mentioned before, sometimes companies will offer you a bonus when you join them as a new employee or get a promotion. Usually, signing bonuses are for new employees who are declining other job offers or aren’t receiving the full pay they asked for. Signing bonuses can be a way to compensate for both gaps.

  • Referral bonus. If you refer a friend or someone from your network to your current company and they get hired, you might get a referral bonus for bringing the new person on. It might take a few months for you to get your bonus as your friend is tested, but it’s an excellent way to encourage bringing good people to your organization.

  • Spot bonus. If you do the above and the beyond for your company, you might get a spot bonus to recognize your work. Things like working overtime without being asked, taking on extra responsibility, helping with a project, or other helpful contributions can qualify you for bonus compensation.

  • Retention bonus. This is like the opposite of a signing bonus since it’s meant to keep you on if you’re thinking about leaving your job or if you continue with the company through a merger or something similar. Companies want to keep their best talent, so if you’re integral to a company, you might get a retention bonus if you try to leave.

  • Holiday bonus. Another common bonus comes around Christmas time or the end of the year. The holidays can be an extra expensive time, but also a time of appreciation and gift-giving. Companies might give out holiday bonuses as a thank you for a year of hard work or a nice holiday treat. Not every company does this, so see what you can find out before signing on to a new job.

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Amanda Covaleski

Amanda is a writer with experience in various industries, including travel, real estate, and career advice. After taking on internships and entry-level jobs, she is familiar with the job search process and landing that crucial first job. Included in her experience is work at an employer/intern matching startup where she marketed an intern database to employers and supported college interns looking for work experience.

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Topics: Guides, Life At Work