What Is Bonus Pay and Why Might an Employer Pay It?
These Are the Bonuses That Employers Pay Out Over the Year
Bonus pay is compensation over and above the amount of pay specified as a base salary or hourly rate of pay. The base amount of compensation is specified in the employee offer letter, in the employee personnel file, or in a contract.
Employers can distribute bonus pay randomly as the company can afford to pay a bonus, or the amount of the bonus pay can be specified by contract.
Companies pay bonuses to employees to thank and congratulate them on meeting and achieving specific goals. Meeting these goals resulted in positive happenings for the organization, its employees, and its customers.
Types of Bonuses
Contracted bonus pay: Senior executives may have contracts that require the company to pay out bonuses. These bonuses are often dependent on the company meeting specific revenue targets, or the employer may base them on different criteria such as sales, employee retention, or meeting growth goals.
While employees might wish that executive bonus payments were tied to performance results, this is not always the case. Contracted bonus pay is not common outside of the executive suite.
Performance bonuses: Many companies offer bonuses to people below the executive level as well, although this practice is rare. These bonuses are based on many different factors, but many companies base them on three things.
- Personal performance. Employees are rated based on how they met, didn't meet, or exceeded the goals set by their management.
- Company goals. While an employee may have had an outstanding year herself, if the company didn't meet its financial goals, the employee won't become eligible for a bonus. On the other side, if the company exceeds its financial goals, it's possible that the employees will receive a higher bonus.
- Pay grade. Typically, if you're paid more money, you're eligible for a higher bonus. For example, if you earn $50,000 a year and meet your goals and the company meets its goals, you become eligible for a 5% bonus, but if you earn $100,000 a year under the same conditions, you could be eligible for a 10% bonus.
Sales commissions: If you're a sales employees (inside or outside), commissions are generally a good portion of your pay. These are often referred to as bonuses as well, but they differ from other bonuses in that they are directly tied to your sales numbers and generally not to anything else. Some companies cap the total sales bonus an individual employee can receive.
A structure of bonus payments is frequently found in sales organizations to reward sales performance at specified levels over and above commission. Some sales organizations reward employees with bonus pay without commission.
Other organizations set team sales goals instead of individual sales goals. As a team member, you'd earn what the other team members make, a portion of the pooled commissions and bonus, if available.
Random bonuses: No one will ever complain about extra money and the boss is always free to hand out bonuses. Many companies do year-end or holiday bonuses that are not part of a contract or promised in the employee handbook.
Employers can change handbooks and amounts of bonus pay, but if the employer doesn't make and communicate the changes to employees, then the company is obligated to pay out as described.
Non-exempt bonuses. Companies need to be cautious when giving a bonus to a non-exempt employee. Under the Fair Labor Standards Act (FLSA), the employer must generally count the bonus pay in the employees' hourly rate when calculating overtime pay.
Why Pay Out Bonuses?
Bonus pay is used by many organizations as a thank you to employees or a team that achieves significant goals. Bonus pay is also used to improve employee morale, motivation, and productivity. When you tie bonuses to performance it can encourage employees to reach their goals, which in turn helps the company reach its goals.
Employees come to rely on bonuses, so companies need to clearly define and communicate about the conditions under which employees are eligible to receive them. Employees are devastated when they don't receive a promised bonus.
As long as bonus pay is discretionary by the employer, it is not considered to be a contract. If the employer promises a bonus, however, the employer is legally and ethically liable to pay the bonus.