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What is Bonus Pay?

By Bethany Keene
Updated May 16, 2024
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Bonus pay is extra pay given to employees, often as a reward or to increase morale and productivity. Bonus pay can refer to a number of different things depending on the company by which one is employed, but it is often directly related to the business's income throughout the fiscal year. Some companies let their employees know ahead of time whether or not they will be receiving bonuses, while others wait until the end of the year to make this announcement.

There are many reasons that an employee might receive bonus pay. Excellent performance on the job that goes above and beyond expectations is one of the most common reasons, and this type of bonus is usually determined by one's superiors. This type of bonus is referred to as merit-based pay, or it may also be referred to as reward pay for a job well done. Holiday pay is another type of bonus pay, where one is paid for a full day's work, but is given the day off.

In some companies, particularly where employees work in sales, employees may receive bonuses for exceeding sales goals. Though most employees in sales positions receive commissions based on a percentage of the value of the goods they sell, the bonuses may go to those employees who have sold more than is required of them. This is a fairly common practice among companies such as auto dealerships, for example.

Other businesses may offer a hiring bonus to new hires once they have worked in a company for a specified period of time. This type of bonus pay is less common, and typically requires the new employee to hold the job for at least a year before they are entitled to receive their hiring bonus. Finally, if a business as a whole exceeds its income goals for a period of time, the business may offer a bonus to all the employees as a show of appreciation.

Many companies use bonus pay as a way to improve morale and increase productivity among their employees, as well as to show appreciation for hard work and a job well done. It can be a great way to encourage employees to come to work on time and be ready to do their best throughout the day. If one is receiving a bonus, keep in mind that bonus pay is taxed the same way as regular income, even if a separate check is received.

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Discussion Comments
By anon318710 — On Feb 08, 2013

I was getting an extra $2 per hour bonus on my paycheck at work and my boss told me in August 2012 that the bonus was my raise. So instead of putting it on my hourly wage, he just added it as a "bonus".

It's February 2013 and my "bonus" has gone down to $1 per hour. This is what I was afraid of. He won't put the raise on my hourly wage because he can take it away. Does anyone know if there is something I can do about it? Also, he splits up my hourly wage (e.g., $8 per hour, $1 per hour for attendance and .50 pr hour for being bilingual) so realistically, my per hour wage is $8 because he can take all of the other things away. Any help on that would be greatly appreciated.

By hamje32 — On Dec 08, 2011

@NathanG - I think bonuses are a good idea, but I’ve never considered them as an incentive to take on a new job. When I was unemployed, a recruiter recommended an information technology job to me which he said would have a very modest base pay, but that I would get a certain bonus at the end of the year for doing well.

It was a significant bonus, and would take the overall compensation up to a level that was competitive. However, I never considered it, because I think bonuses are up in the air; you can’t depend on them, and you certainly can’t budget for them.

By NathanG — On Dec 08, 2011

We sometimes get bonus pay at our workplace. Usually it’s not based on individual performance; it’s just something that is given to all employees.

Whether we get it or not depends on how well the company is doing that year. It’s a small business and we have to meet certain sales targets each month to meet payroll.

If we do well, we get a bonus for the year. Of course the sales people get their own type of bonus in the form of commissions, but that’s a separate thing altogether. This is actually the first job I’ve worked where I’ve received a bonus, and it’s quite nice to have it.

By John57 — On Dec 07, 2011

Most of the time I think bonus pay is a really good idea. My son is very goal oriented and gets excited about contests and reaching sales goals.

He has worked as an insurance salesman for many years, and seems to excel at this no matter what company he works for.

His family has been able to take some really nice, free trips because of the extra bonus pay he receives from his hard work.

It doesn't always work out as planned, and I guess that is why it is called 'bonus' pay. One company he worked for, went out of business and was not able to pay what my son thought he was going to get in a year end bonus.

Ever since then, he has looked at this as extra 'surprise' money and doesn't plan on using it to pay his bills every month.

By honeybees — On Dec 07, 2011

When my friend graduated from medical school, she had a lot of debt that she had incurred during this time.

She knew the best way she could repay that debt was to go to work for a hospital that would agree to repay the debt. Many hospitals will do this if you agree to work for them for a certain number of years.

Another advantage to this was she also received a nice sign-on bonus. Because she graduated near the top of her class, there was no problem for her finding hospitals that were willing to do this.

The nice thing about the sign-on bonus was this was immediate money she had to live on and get settled. After living so long on next to nothing just to get through school, this was an added bonus for her.

She had more than one really good offer, and had to make the decision of where she wanted to live for at least the next 5 years of her life.

By LisaLou — On Dec 06, 2011

My husband is in charge of a construction crew that builds bridges. As a supervisor, he is entitled to a bonus at the end of the year. This bonus is directly related to the percentage of profit he has made for the company over the year.

This is a good incentive for him to make sure his jobs always do well. There are a lot of times when situations are out of his control. One example is if they don't have much money in the project to begin with.

Even though we expect some kind of bonus every year, we always know it might be a small one, or maybe none at all.

Because of this we don't plan on using this money for everyday living expenses. If we get a bonus, we set some of it aside and use the rest for something special for the family.

By popcorn — On Dec 05, 2011

@manykitties2 - Most of the bonus pay calculators online are geared more towards helping employees figure out how much they are going to get taxed on extra pay. If you are looking for a bonus model to follow your boss could try something like spot bonus awards, or something like current profit sharing.

Basically with spot bonus awards, your boss is looking at $50 and up for every employee, while the profit sharing could be around 2.5% to 7.5% of the company's profits.The money with profit sharing is basically put in a giant pot and divided up among employees based on company performance.

By manykitties2 — On Dec 05, 2011

Does anyone know of a good bonus pay calculator that I can use to help my employer out?

My employer is operating a small business and isn't sure what kind of bonus pay he should be handing out come Christmas time. I told him that I would check out to see if there were any set rates online, and if there was a calculator he could use to plan pay bonuses.

I know that a lot of businesses give bonus pay around Christmas, as a way to reward hard work and loyalty, so I want to make sure my boss has the correct rates. I wouldn't want the business offending anyone.

By Perdido — On Dec 04, 2011

Sales bonus pay is often among the most generous. Salesmen are regarded as the most valuable members of a team, since they are directly responsible for bringing in revenue. This is apparent where I work, because they seem to be the only workers who get rewarded for their work on a regular basis.

In addition to weekly bonus pay, the company I work for offers an extra incentive to hard working sales reps. Whoever exceeds their goal for the week gets to go home at noon on Friday. Since sales reps receive a set salary instead of hourly pay, they are not out any money by leaving early.

By OeKc05 — On Dec 04, 2011

I work at an ad agency, and the boss takes very good care of his sales representatives. In order to keep them in a competitive mood, he offers a bonus check to whoever sells the most every six months.

Though they are all friendly to each other, I know that they are constantly trying to outsell each other. That check is for thousands of dollars, and it is one of the best ideas my boss has ever had. Since he introduced the bonus check, sales rates have nearly doubled.

The graphic designers don't get any extra money for working hard. All we get is a free ham at Christmas and a free turkey at Thanksgiving. It's better than nothing, but we aren't motivated to work for it, because everyone gets it, no matter how poorly they have worked throughout the year.

By wavy58 — On Dec 03, 2011

@StarJo – That's nice that he can look forward to those incentive checks so often. I wish my company would consider offering these.

I work hard at a factory every day to meet my quota. I don't get any sort of reward for reaching my goal. All I get is the comfort of knowing I won't get yelled at for being unproductive.

I think that bonus pay like this can improve employee satisfaction greatly. We need to be motivated in order to keep up with the drudgery of doing the same thing all day long. That's why so many people leave this job. They have nothing to look forward to, so they move on to greener pastures.

By StarJo — On Dec 02, 2011

When my husband started working as an order filler at a giant warehouse, his boss told him that he would receive bonus pay in the form of an incentive check every four months. This check would be based on his productivity and income, because it would be a percentage of how much he had earned up to that point.

He makes a base salary, but he can make more than that by running at a higher percentage. The company pays him extra money for every percent he runs over 100, up to 131 percent. This motivates him to work fast and hard.

Since he has to work at least eleven hours a day doing this, it isn't easy to keep up a high percentage. The company knows this, and that's why they dangle the bonus pay in front of their employees.

By sunshine31 — On Dec 02, 2011

@SauteePan- Pay for performance is also offered in jobs with a lot of risk. If you work as a CEO you are responsible for the profitability of the entire company and should be compensated with executive pay plus a performance bonus if you are successful.

Some people think that CEO’s are paid too much but if the financial results for the company were good then the CEO should also be compensated for his or her effort because if the results were bad they would be fired right away too.

Sometimes the bonuses are more than the annual salary and that is smart because it forces the CEO to focus on the bottom line in order to get the huge bonus payout later on.

By SauteePan — On Dec 01, 2011

I understand that there may be some unethical people but when you are dealing with sales positions or even high level managerial positions pay for performance is expected.

A pay for performance bonus is what gives these types of employees the motivation to work for one firm versus another. Yes there is personal satisfaction at a job well done, but if you are good at what you do you should be given a pay for performance bonus because that is only fair.

I don’t see anything wrong with it especially if you worked hard and turned around a department. It is validation that the company appreciates your efforts.

This is one of the ways to recruit great talent and the companies that don’t offer a performance bonus plan like this will be at a disadvantage.

By MrsWinslow — On Nov 30, 2011

@jennythelib - I've heard of that, too. It's interesting because hardly anyone takes the offer. I guess that means they are really careful about who they hire in the first place. Then they weed out anyone who realizes they've made a mistake taking the job by paying them to quit. (Otherwise, those people might have stuck around out of inertia or until they found another job, but their heads wouldn't be in it.)

I think the effectiveness of their reverse bonus shows how important it is for performance pay to be used really carefully! When you attach incentives to something, the consequences can be unintended; people might take inappropriate risks, use unethical strategies to meet performance targets, etc. As anyone knows who's ever read Freakonomics!

By jennythelib — On Nov 30, 2011

It's easy to keep a job if you know that you have some sort of retention incentive pay coming your way. Zappos actually does this backward. They train you, and then they offer you a significant chunk of money (I think it's like three grand?) to *quit*!

That's right, they will pay you to walk away. The idea is that then, they keep only those employees who are committed to the job. Part of how they provide such remarkably excellent customer service!

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