Bonus

What Is a Bonus?

A bonus is a payment made in addition to an employee's base salary or regular wages. Employers use bonuses to reward work already completed, recognize strong results, or encourage specific behavior. Unlike a raise, a bonus is typically a one-time payment that does not automatically increase future base pay, although some employers build bonuses into ongoing compensation plans.

How Bonuses Work

Bonuses are often tied to measurable goals. These may include individual performance targets, team results, or overall company earnings or profit. Many companies set a target bonus as a percentage of salary, and the actual payout rises or falls depending on how well the goals were met. Some bonuses are discretionary, meaning the employer decides whether to pay them and how much. Others follow a formula written into a compensation plan.

Bonuses may be paid at different times. Common types include annual bonuses, quarterly bonuses, signing bonuses paid when a new hire joins, and retention bonuses paid after a set period of service. In many countries, bonuses are taxed as ordinary income under the same income tax rules that apply to salary, and taxes are usually withheld before the employee receives the money.

Advantages and Drawbacks

For employees, bonuses can add to total earnings and link pay to results. For employers, bonuses can be more flexible than permanent salary increases, since they do not necessarily raise fixed costs in future periods. The drawbacks are uncertainty and variability. Bonuses may depend on factors outside an employee's control, and they can be reduced or cancelled in a weak year, which makes income less predictable.

Bonuses and Investors

For investors, bonus costs are part of a company's operating expenses and can affect reported profits and operating margin. Some companies pay bonuses in stock-based compensation rather than cash, which can dilute the ownership stake of existing shareholders. Executive bonus arrangements are often described in a company's annual report and proxy statement, where investors can review how performance targets were defined and how much was paid.