How do bonuses work? Everything you need to know about compensation

Being offered a bonus is a huge achievement. It’s not standard protocol for an employer to give out free money, so if you have one on your horizon, congratulations! You are being recognized for your efforts in making the company successful.

There are many different types of bonuses and they all offer slightly different perks. Continue reading to learn more about how these forms of compensation work. 

In this article we’ll discuss:

• The most popular types of bonuses, why they’re offered, and what you’ll receive

• How bonuses are usually structured and how you’ll likely receive the compensation

• How much is a good bonus? 

9 Different types of bonuses

There are a lot of different types of bonuses that you have potential to be offered at work. These are the most common workplace bonuses and what you can expect from them: 

1. Profit-sharing bonus

Profit-sharing bonuses offer an opportunity for employees to feel ownership over a portion of the company. Whatever the company’s profits are that fiscal year, employees with a profit-sharing bonus will be compensated with an agreed-upon percentage. Doing so incentivizes employees to work towards the company’s success while rewarding them for it too. 

2. Spot bonus

Sometimes called a “discretionary bonus,” spot bonuses are awarded to employees for going above and beyond. Such bonuses promote exceptional performance standards, motivating employees to maintain positive attitudes at work and continue striving for excellence. 

3. Non-cash bonus

Examples of non-cash bonuses include receiving extra paid time off, vacation days, awards of recognition, or other non-monetary perks. 

4. Sign-on/signing bonus

Signing bonuses are common in competitive industries as a way to show gratitude to a candidate for selecting that company. When a highly desired candidate is considering the pros and cons of multiple job offers, a signing bonus can sway their decision. Additionally, some employees seek out employers based on whether or not they offer signing bonuses. 

Some signing bonuses do come with agreements about the length of employment or other terms and conditions. If you are offered a signing bonus, be sure to ask about any conditions of the offer. 

5. Holiday bonus

Traditionally called “Christmas bonuses,” the holiday bonus is an opportunity for employers to extend their gratitude around a time of year that is commonly associated with tight finances: the end-of-the-year holidays. 

Some companies offer holiday bonuses based on a percentage of the employee’s annual salary. Some companies offer more simple thank-you gestures, such as a company dinner or gift cards. 

6. Annual bonus

Annual or end-of-year bonuses are typically offered as a percentage of the employee's annual salary and are at the discretion of the employer to decide how much and how often those bonuses are distributed. 

7. Retention bonus

For highly valuable employees, retention bonuses might be offered to ensure your loyalty to the company. They can also be offered during company mergers or acquisitions when the new leadership team is relying on experienced staff to stay on board and support the transition. 

8. Severance pay

When a company needs to lay off a valuable employee, they might be offered a severance package. Usually, the package includes monetary compensation, and it’s also common for companies to pay out unused sick leave and vacation time, or even extend health coverage by a few months. 

Severance deals are commonly discussed during the initial interview and negotiation period. 

9. Stock shares

Companies that are recently starting up, as in, companies who might not have a lot on hand to offer employees in the way of bonuses and benefits, might offer employees stock options instead. Basically, this means the employee can purchase stock shares at a fixed rate, and as the company grows and becomes more successful, the value of the stock will increase. 

While this may seem like a lesser option, pause for a moment and consider companies like Google and Amazon. When Amazon first entered the market in 1997, one share of stock cost $18. The company has undergone a number of stock splits since then, so the equivalent value of an original share is $0.075. As of 2024, a single share is worth over $130. Staff who took a stock share option probably made more from that decision than from their salary.

If you believe in the vision of the company you work for, and they offer a stock share, it could end up being quite lucrative. Weigh your options, and speak with a professional who can help you do the math to forecast the benefits. 

What is a typical bonus structure?

Bonuses are usually predetermined by the company, and the employees are not typically included in the discussion about it. Most bonuses are based on a percentage of an employee's base salary, an average of 7.5% can be expected. 

Do bonuses get taxed?

Yes, and in fact, they are usually taxed at a slightly higher rate than your salary, because bonuses are considered supplemental income. The IRS taxes supplemental income at a flat rate of 22%. 

What percentage of salary is a good bonus?

A good annual bonus would be 10% of your salary, and an excellent bonus is 15%. 

Why do companies give bonuses instead of increased salaries?

There are a number of reasons a company might offer bonus incentives instead of an increased salary. The most likely is that they are a newer company, still establishing their footing in the market. This can create uncertain financial forecasting. 

If a company isn’t positive that they can afford specific salary points for their employees without risking going under, a bonus might be offered instead. Bonuses are not guaranteed and often are written to be one-time-only. Meaning, if a company is having a less-successful year, it can simply not offer an annual bonus to help save money. 

Is it better to get a raise or a bonus?

The simple answer is that every situation will require the individual to do the math. Be sure to keep in mind that bonuses are taxed as supplemental income, so when you are working through the numbers, be sure to equate the proper percentages. 

What are bonuses normally based on?

Financially speaking, bonuses are usually based on a percentage of either your income or the annual profits of the company. 

Strategically, bonuses are offered to the employees that are producing the most effective work. You can ask your management team what kind of key performance indicators (or KPIs) they measure as a way to help understand what type of results might lead to a bonus.  

Can you ask for a bonus?

Asking for a bonus can be a tricky situation to navigate. You don’t want to create an ultimatum or display a sense of being undervalued. But you do want to advocate for yourself. If this feels appropriate for your situation, it might be in your best interest to reach out through email. Asking for a bonus should be eloquent and kind in nature. An email also offers your employer a moment to take in your request and consider it thoughtfully. If done in person, an employer might respond in a rush, typically with a rejection of the request. Giving them space might allow them to meet you in the middle. 

How are bonuses usually paid out?

The way you’ll receive your bonus depends on the type of bonus you are offered, as well as the policy of your company. 

Typically speaking, the bonus will either be in the form of a check or a lump sum that is added to your next paycheck. This is the most immediate method for accessing your cash, so it’s preferred by most. 

If you have direct deposit, your bonus will likely be delivered in the same way. If the company decides to include your bonus in your paycheck, then you might have to wait for the next billing cycle to receive the cash. Some companies will submit a separate direct deposit payment so that you don’t have to wait. 

If you’ve been offered a bonus, speak with your supervisor about the details. Ask about the company's bonus payout policies to get a better idea of what to expect. 

Learn more about bonuses and other topics related to Pay & Salary at Career.io!

Key takeaways

1. There are a variety of different bonuses you might encounter in your career. Each bonus offers a slightly different type of compensation.

2. Bonuses are considered supplemental income and will be taxed at a higher rate than normal income. 

3. A great bonus would be about 10-15% of your annual salary. But most people receive offers closer to 5% of their annual salary.