Pay & Salary

What Is a Bonus? Definition and Types

June 10, 2021

Companies often give bonuses to their employees to keep them motivated and engaged in their work. Many types of bonuses exist, and their structures may vary depending on the size and net worth of a company. Knowing how bonuses work and their different types can help you choose a job with a good compensation package. In this article, we will define a bonus and discuss the several types of bonus structures a company might offer.

What is a bonus?

A bonus is a monetary or non-monetary reward that is given on top of the normal payment an employee receives. Companies may award bonuses to certain employees for their exceptional performance throughout the year. But sometimes companies roll out bonuses for all the employees. Some employers also award a joining bonus or a retention bonus.

Every company has its own bonus structure, and it often depends on its business type, yearly performance and industry standards. For example, a sales team might earn a commission as a bonus structure. A large sales office could offer a larger commission bonus structure versus a smaller sales office.

Related: Salary Negotiation Tips and Examples

Types of bonus

Here are some common types of bonuses that businesses offer to their employees:

Profit-sharing

Profit-sharing is a type of bonus where employees are given a percentage of the company's profit. The companies pay this quarterly or annually depending upon their bonus plan. Some companies make a profit-sharing mark and when they reach that threshold, they distribute profit as a bonus to their employees.

Spot bonus

A spot bonus is awarded for exceptional performance on a certain task. For instance, you can get this financial reward when you go above and beyond your normally assigned duties. Spot plans are usually meant for individuals and not for teams.

The name for this program comes because a supervisor or manager gives the bonus "on the spot." This is not a time- or goal-based plan. The amount varies depending on the company and the act that prompted the bonus.

Non-cash bonus

A non-cash bonus award can come in a variety of forms, including a certificate, a trophy or a special intra-company award feed. For example, your company could give you an Employee of the Month award or trophy. Supervisors can be in charge of nominations for non-cash awards, though in some bonus structures, companies have an intra-company award feed where fellow employees nominate coworkers for awards. This is an ideal way to foster teamwork in the workplace.

Referral bonus

A company gives out a referral bonus to current employees for referring new hires. Some companies award the bonus when your referral completes their 90-day probation period. Other companies give a referral bonus once you have referred a certain number of candidates. This bonus structure can help companies recruit new talent quickly when they experience a rapid rate of growth or when new departments have opened up.

The amount of a referral bonus can vary depending on the policies of a company. Somewhere it is a flat amount for every role and somewhere it depends on the job role and the skills required for the job. If the skills are harder to fill, then the bonus amount can be very attractive.

Signing bonus

Some companies give a signing bonus to new employees when they first accept the job offer. Different companies have different rules for releasing the signing bonus. Some companies give it immediately after the completion of the onboarding process, while some firms pay it after a few months. Also, most employment contracts include a clause that states the employee has to return the entire joining bonus if they leave the company within a defined number of months of joining.

Companies use this type of bonus structure to attract employees with hard-to-find skills and when the unemployment rate is low to attract more eligible new hires.

Related: How To Succeed in Your New Job: The First Week, Month and 90 Days

Milestone bonus

Companies give a milestone bonus, also called a mission or task bonus, for achieving a milestone on a project or a goal. This bonus is usually allocated to projects with critical deadlines. Companies can award milestone bonuses during the middle of a project or after a small milestone is achieved.

The company decides the milestone and timelines in advance so a team has a goal to work toward if they want to achieve the bonus. Software or hardware development companies use these bonus structure programs during developmental projects to motivate team members. They also might require a quality check as part of the bonus incentive.

Project bonus

A company can award a project bonus after the completion of a project. Most companies use a project bonus to keep their employees motivated. Companies meticulously plan this type of bonus by involving the senior management. Employers usually define and communicate the timelines of a project well in advance for the team working on it.

The project bonus is usually a cash bonus given as a one-time payout to the team or individual. Another name for this bonus is the goal bonus.

Attendance bonus

Attendance bonuses are often given to employees who have a perfect attendance record. Companies pay out attendance bonuses either quarterly or annually depending on their bonus policies. This bonus is common in service-based industries, such as hotels, restaurants, pharmacies, which are open throughout the year and have minimal closure dates. Employees in these industries do not have a defined set of holidays and may even have to work during festivals or public holidays. Such companies offer this type of bonus as a reward to their employees.

Annual bonus

Companies can give an annual bonus to their employees based on their yearly performance. Some companies award annual bonuses by collectively assessing the company's yearly performance and an employee's yearly performance. The size of the annual bonus may also vary depending on your job position in the company. However, some companies give a flat bonus to all the workers, irrespective of their designation in the company.

Related: What Is a Salary Slip? Importance, Components and Format

Holiday bonus

A holiday bonus is usually a gift that companies give to their employees during the holiday or festival season. These bonuses are neither performance-based nor time-based. Some companies give gifts to their employees, while some give monetary rewards, like one month's salary.

Commission

Commissions are typically given to the sales team of a company. Sales professionals earn a commission when they achieve their sales target. The commission often constitutes a good portion of their income.

The criteria for earning commission can vary from company to company. For instance, some companies give a percentage of the total sales amount, while others may set an upper bar on how much commission a salesperson can receive. The commission payout can be done monthly, quarterly or even annually.

Retention bonus

A retention bonus is usually offered during mergers and acquisitions or if the employee is leaving the firm for a better offer. A retention bonus is planned to encourage employees to stay with the company for a longer duration. The manager or supervisor ties the bonus payment to a project that is ongoing during the merger or acquisition. Once the project is complete, the company awards the bonus to the team or employees.

Related: All You Need to Know About Notice Period for Resignation

Longevity bonus

A longevity bonus is awarded to employees who work for a company for a significant amount of time. A longevity bonus can be a cash reward or a salary raise when an employee completes a milestone year. The bonus structure can vary from company to company. Companies might offer multiple tiers of longevity bonuses with milestone bonuses starting once an employee has been with the company for a significant amount of time. This bonus structure awards senior employees for their many years of service with the company. This also helps increase employee loyalty.

Safety bonus

A company gives safety bonuses to team members when safety goals are met. This can include rewarding teams for meeting their targeted safety goals or an individual for meeting a personal goal. Companies usually award safety bonuses quarterly or annually.

Some companies structure their safety bonus program by rewarding safe behaviours instead. These can include reporting any safety violations, making suggestions that improve safety behaviour or being on the safety committee.

Dividend bonus

A company pays a dividend bonus to its shareholders. If an employee is also a shareholder of the company, they can get this type of bonus. This is a very common type of bonus for the shareholders. The value of the bonus usually reflects the number of shares each shareholder has. Generally, a dividend bonus is paid from the profits. If a company has made a loss, then that year's dividend bonus can not be awarded to the shareholders.

Related

View More 

How Much Do Anesthesiologists Make? Salary and Career Advice

Discover how much anesthesiologists make, what these professionals do and if they earn more than surgeons, and explore the steps to become an anesthesiologist.

Average Doctor Salaries: A Complete Guide by Specialty

Find out about average doctor salaries and how these can vary considerably according to the doctor's speciality, location, experience and workplace.