What Is a Bonus? Definition and Types
There are many factors to consider when it comes to compensation. It is actually the first salary an employee receives. When it comes to total pay, job seekers and employees must take into account base pay, benefits, stock options, bonuses, and raises. Many occupations offer additional compensation such as overtime, on-call, special project pay, and investment options.
Collectively, bonus compensation is an additional payment beyond your hourly or base salary.
You might be wondering, “What are these other forms? How do I get them?
We are here to help. If you are a happy employee and want to know more about your current salary, If you’re speaking to a recruiter and feel overwhelmed with all the talk about numbers, Here’s a quick cheat sheet that will help you identify the most popular types of bonuses offered by top companies.
What is a Bonus?
A bonus is an additional payment to employees that goes beyond the regular salary. For exceptional performance during the year, companies may offer bonuses to employees. Sometimes, companies offer bonuses to all employees. Employers may also offer a joining bonus or a retention bonus.
Each company has its own unique bonus structure. It often depends on the business type, industry standards, and yearly performance. A sales team might be paid a commission. A larger sales office might offer a higher commission structure than a smaller one.
Also read: Accounts Payable Process: Definition, Challenges & Streamline of AP Process
Types of Bonus
1. Annual Bonus
Based on an employee’s base salary, the most common bonus type is one that is paid annually. In most cases, each employee is given a target bonus that represents a bonus at the end of the year. If the manager or company determines that an employee a.k.a. The annual bonus will be paid if the manager or company determines that an employee, a.k.a. This is where the key lies: the annual bonus will be paid if the department or company achieves certain business performance results.
Like most bonuses, the amount or percentage of the annual bonus can vary among departments and positions. This is decided by the company’s HR and leadership teams.
2. Sign up for a Bonus
A signing bonus, or what Amazon and other companies call a “Sign-On Bonus”, is a one-time payment that a company offers to job applicants who are highly sought after by recruiters. This is a carrot that a company or recruiter may offer to you to help you get hired.
A signing bonus may be available if you:
- The recruiter offers $90,000. You have negotiated for $100,000 in salary, but you are only able to offer $90,000. To make up the difference, you may be offered a $10,000 signing bonus.
- There are competing offers from another company.
- The company wants to poach you from another company and cash out your stock options.
- Signing bonuses often require that employees stay with the company for at least six months or one year.
3. Spot Bonus and Discretionary Bonus
Spot bonuses may be available to those who have achieved significant goals or performed exceptionally well. These bonuses, also known as discretionary bonuses, can come in the form of three- to four-figure bonuses for some companies and are used to reward exceptional performance. Managers and executives usually have discretionary funds to reward employees who have had a significant impact on their business.
These gifts are given in spur-of-the-moment to recognize exceptional performance. They can also be great motivators, especially in difficult times. Some employers will also give spot bonuses in the form of gift cards or additional time off.
4. Retention Bonus
Retention bonuses are a reward for employees who stay with the company for a prolonged period. These bonuses are used to keep high-performing employees, especially in a competitive job market. Many companies offer retention bonuses to discourage employees from leaving for a better job.
A retention bonus is typically a one-time payment. Many companies prefer them to a salary increase, as they may not be able to commit to a long-term rise.
5. Referral Bonus
The U.S. The U.S. Office of Personnel Management states that a referral bonus is an award to employees who refer people for vacancies (i.e. After the vacancy has been made available for the open competition via proper channels. After the person has been hired by the agency and does the job well, a referral bonus could be paid.
Referral bonuses are given to current employees for helping to recruit new employees. They can vary depending on several factors.
- Role: Engineers are able to refer more employees than others.
- Difficulty in Hiring: A company may increase the incentive or bonus if they feel that the role will be difficult to fill.
- Diversity: Intel encourages its employees to refer diverse candidates. It also rewards those who refer women, veterans, or underrepresented minorities.
Also read: Top 10 International Payment Gateways for Business
6. Holiday Bonus
A holiday bonus, as the name implies, is given during winter holidays and can be used by companies to show appreciation for employees’ hard work. Holiday bonuses are available in any amount and can often be used to increase productivity, retention, and motivation. A lot of companies will tie holiday bonuses to employee performance. They may also tell you what led to the reward. This could be stretching out, exceeding sales goals, or any other key performance indicators (KPIs).
7. Profit-Sharing Bonus
A profit-sharing bonus is not like an annual bonus. It awards employees a portion of the company’s profits. It is based upon the actual earnings of the company over a specified period. This type of bonus is only available to employees if the company makes a profit.
Part of the company’s pre-tax profits is donated to a pool which is then distributed to eligible employees. The salary and title of the employee determine how much is distributed. The bonus can be either in cash or stocks.
Delta Air Lines determined that it would pay $1.6 billion to its 90,000.00 workers in profit-sharing bonuses. The checks were distributed to both part-time and full-time workers. Executives are receiving their performance-based bonuses.
Sales teams love commission plans. They are based on how much money or revenue a person has made in sales. A sales commissions structure is a way to clearly define the number of commissions that will be paid at the end of each year. They are an addition to a base salary. This shows how much the company will pay each salesperson.
According to HubSpot, there are several types of Commission structures.
- Base Salary plus Commission: This plan provides salespeople with a base salary and commission. 60:40 is the standard ratio of salary to commission, with 60% fixed and 40% variable.
- Absolute Commission Plan: A commission is paid for completing specific activities or achieving specific goals. A salesperson could be paid $1,000 per new customer, for example.
- Relative Commission Plan: A relative commission plan is a way to set a goal or quota. Let’s take, for example, a salesperson who has a quarterly target of $90,000. They also receive a $10,000 quarterly commission. They’ll get 85% of their quota if they achieve it.
- Territory Volume Commission Plan: This commission structure allows salespeople to work with clients within clearly defined areas. They are paid per territory, not per sale.
- Straight-Line Commission Plan: This straight-line commission plan rewards sellers based on how many or few they sell. They receive 90% of their commission if they sell 90% of their quota.
- Tiered Commission Plan: This tiered structure encourages reps and allows them to work harder by offering higher commissions when they reach significant sales milestones. Reps can be paid higher commissions if they reach their quota or exceed it, and continue closing more deals than they are expected to.