What Is a Bonus?
Let me explain what a bonus really is—it's financial compensation that goes beyond what you normally expect in your pay. Companies hand these out to everyone from entry-level staff to top executives. Sometimes, they give bonuses across the whole company just to avoid any jealousy among the team.
You might see bonuses used as bait to attract new hires, or given to current employees to recognize their work and keep them around. Even shareholders can get in on it through bonus issues, where the company offers free extra shares of stock.
Key Takeaways
Remember, a bonus is extra pay beyond your usual compensation. Companies use them as incentives or rewards for good performance. Common types include signing, referral, and retention bonuses. You can receive them as cash, stock, or options, and they're distributed in various ways.
Understanding Bonuses
In the workplace, a bonus supplements your base pay or salary—it's additional compensation from your employer. Use them to reward achievements, thank you for sticking around long-term, or lure you in if you're not yet with the company.
These can come as cash, stock, or options, and go to individuals, teams, or everyone. Incentive types include signing bonuses for newbies, referral ones for bringing in good hires, and retention to build loyalty. Performance bonuses hit for great work, like annual ones, spot rewards, or milestone payouts.
In the US, the IRS treats bonuses as taxable income, so you have to report them on your taxes. Your employer reports and withholds taxes based on your bracket and current laws. Be aware of this to avoid penalties—keep records and talk to a tax pro if needed.
Incentive Bonuses
Incentive bonuses cover signing, referral, and retention. A signing bonus is money offered to top candidates to get them to join, especially if competitors are chasing them—it's meant to pay off in the long run. You'll see this in pro sports too, luring athletes from other teams.
Referral bonuses go to you if you recommend someone who gets hired, encouraging you to suggest people with strong ethics and skills. Retention bonuses keep key staff loyal during tough times or changes, showing their jobs are safe.
Holiday Bonuses
Some companies give bonuses during the holidays, like in December, in forms such as cash, gift cards, or gifts. These might go to individuals or the whole company, sometimes based on tenure or performance.
In places like Mexico, it's law—called Aguinaldo, a 'thirteenth salary' equal to 15 days' pay, due by December 20 for all employees. Miss it, and fines can be huge. Other Latin American countries like Costa Rica and El Salvador have similar rules.
Performance Bonuses
Performance bonuses reward standout work, often after projects or at quarter/year ends. They can go to you, your team, department, or everyone. These might be one-time or ongoing, usually cash but sometimes stock, cards, time off, or even just thanks.
Examples include annual bonuses, spot ones for quick recognition (around $50), and milestone for long service like 10 years. Some contracts share profits as bonuses, with execs getting bigger cuts.
Bonus Inflation
Traditionally, bonuses go to top performers, but some companies give them to underperformers too, which can slow growth. It's often to avoid backlash—easier to pay everyone than explain denials.
Assessing performance isn't always straightforward; you might miss quotas due to factors beyond control, like delays or downturns.
Special Considerations
Companies are swapping raises for bonuses, which can frustrate you since bonuses are discretionary—they can skip them in bad years without cutting base pay.
Shareholders might get dividends from profits or bonus shares if cash is tight, letting them sell for money or hold on.
How Much Is a Bonus Usually?
Bonuses vary—no fixed amount in the US, depending on industry, company size, your role, and performance. They range from hundreds to thousands or more. Some are preset like signing or retention, others performance-based.
Do Bonuses Count As Salary?
No, bonuses are extra, not part of your salary, but the IRS taxes them as income.
Why Do Companies Give Bonuses?
Companies use bonuses to encourage behavior, reward performance, show appreciation, retain key people, attract talent, or share success. They might also give to shareholders as dividends or extra shares.
The Bottom Line
A bonus is extra reward beyond your normal pay, for incentives or performance. It comes as cash, stock, or options to individuals or groups. Types include incentive and performance bonuses, and remember, they're taxable—so report them.
Other articles for you
An offering price is the initial per-share value set by an investment bank for publicly-issued securities during an IPO.
Economic forecasting predicts future economic conditions using key indicators but faces challenges like bias and inaccuracy.
Written-down value represents an asset's current book value after subtracting accumulated depreciation or amortization from its original cost.
A trading range is the difference between the highest and lowest prices of a security over a specific period, serving as a key indicator of volatility and trading opportunities.
Financial risk encompasses the potential for monetary loss affecting individuals, businesses, and governments through various types like credit, liquidity, and operational risks.
Middle-income countries are economies classified by the World Bank with GNI per capita between $1,136 and $13,845, playing a key role in global growth.
An incumbency certificate is a corporate document listing authorized directors, officers, and key shareholders for legal transactions.
Income funds are investment vehicles focused on generating regular income through bonds, stocks, and other securities rather than capital growth.
Operating margin measures a company's profitability from core operations by dividing operating income by net sales.
IRS Publication 463 details deductible travel, gift, and car expenses for individual taxpayers to reduce taxable income.