What’s the deal with bonuses, and how can I negotiate a bonus structure?

We’re talking all about bonuses. If you’re looking for a job with a decent base salary plus a lucrative bonus structure, you’ve come to the right place. 

In this guide, we’re exploring the pros and cons of supplemental wages. We’ll talk about the most common types of bonuses, how taxes affect your supplemental income, the advantages of bonuses, the drawbacks, and the difference between a bonus and a gift. 

But that’s not all. 

We’ll also discuss what to do when you’ve exceeded company goals, and you’re pretty sure you’re owed something extra in your paycheck. 

Should you pursue a salary raise, a bonus, or another lucrative form of compensation?

Let’s talk bonuses! 

What Are Bonuses?

Bonuses are compensation paid to an employee. Bonuses are supplementary to the agreed-upon hourly rate or annual salary an employee earns. 

While many companies provide monetary (cash) bonuses, a bonus can take other forms. However, it’s best not to repeat the mistakes of Clark Griswold’s boss in Christmas Vacation. Bonuses probably should not come in the form of a “jelly of the month” subscription. 

How Do Bonuses Work?

Because there are many types of bonuses, they all work differently. However, many companies have predetermined formulas to ensure fair pay relative to performance.

Here are a few ways bonuses work:

• Performance-Based or Goal-Based: Meet or exceed goals and receive a bonus based on performance. 
• Commission-Based: Often outlined in contract agreements, receive commissions and/or bonuses based on milestones. 
• Referral-Based: Refer new, successful hires and receive a bonus. 
• Appreciation-Based: Hit a tenure milestone, land a specific client, or go above and beyond your job description and receive an often unexpected bonus. 
• Periodic Revenue Sharing-Based: Make a certain amount of money for the organization and receive a percentage of it as a bonus. 

How Bonuses are Calculated

If you’re looking to calculate a bonus structure, these bonus calculators from Eddy can help create salary-based and commission-based figures.  

Pro Tip: If you’re an employee negotiating salary and compensation for a new role, discuss bonus structures so that you understand how you can earn your bonus. 

What is the Tax Rate for Bonuses?

We can’t talk about any compensation without addressing the elephant in the room. Yes, we’re talking about the IRS and how your bonus looks after it’s taxed. 

Since bonuses are usually considered “supplemental wages”, they are taxed at a higher rate than your regular paychecks. Bonuses less than or equal to $1 million are subject to a 22% federal tax. Bonuses over $1 million dollars are taxed at a rate of 22% for the first million and 37% for anything over. 

We got this example from TurboTax to calculate a very large bonus of $1.37 million: 

• $1,000,000 x .22 = $220,000 tax on first million
• $1,000,000 x .37 = $370,000 tax on second million
• $220,000 + $370,000 = $590,000 total tax

Employees looking to take home more of their bonus can negotiate a way to spread their bonus between paychecks to reduce the supplemental income tax. 

For more expert, up-to-date information on how bonuses are taxed, head over to TurboTax’s CPA-reviewed article, How Bonuses Are Taxed. 

Types of Bonuses

Bonuses are typically given as performance-based rewards. Not unlike a commission structure created for salespeople, bonus pay will often reflect an employee’s performance. 

There are many types of bonuses, and they all have their pros and cons. In this next section, we’ll dive into each type of bonus, when the payout occurs, and the pros and cons of each. 

First, we’ll explore the two umbrella types of bonuses; discretionary and nondiscretionary bonuses. 

1. Discretionary Bonus

A discretionary bonus is a form of variable pay that is not disclosed in advance. Translation? A discretionary bonus is awarded at the discretion of an employer and is received unexpectedly. Surprise! 

Discretionary bonuses are awarded when an employer wants to show appreciation for a job well done. Unlike a nondiscretionary bonus, a discretionary bonus isn’t structured nor written into a contract. There is no obligation for an employer to give this surprise bonus. 

Pros: A discretionary bonus is a great way to show real appreciation. The “surprise” element of a discretionary bonus adds a certain sense of delight and celebration, too! 

Cons: Since discretionary bonuses are unexpected, employees can’t accurately budget this extra pay into their annual expenses.

2. Non-Discretionary Bonus 

If you guessed it, you’re right. The non-discretionary bonus is the opposite of a discretionary one. Non-discretionary bonuses are expected by employees beforehand. While they are still delightful to receive, non-discretionary bonuses most often have a set of standards and schedules set. 

It’s common for employees to receive this type of bonus as a reflection of production goals, profit numbers, or client acquisition. 

Pros: An employee can plan their goals and budget according to their target bonus. 

Cons: An employee exceeding all goals might feel that the formulaic non-discretionary bonus structure doesn’t adequately recognize their hard work. 

3. Incentive Bonus 

An incentive bonus is a type of non-discretionary bonus. After achieving a set goal, employees receive incentive bonuses. This type of bonus is a perfect example of a non-discretionary bonus. Employers and employees set the terms of incentive bonuses, write them into an employment agreement, and get to work.

Incentive bonuses are the perfect way to incentivize a certain level of performance. As such, this is the best bonus to negotiate before accepting a job.

4. Signing Bonus

If this type of bonus sounds like a car commercial to you, well, you’re not wrong. Just like buying a car, taking a new job position is a big decision. When you have to pack up and move for your new job, the decision is even more monumental! 

Signing bonuses describe a one-time sum of compensation provided to an employee starting a new role. Signing bonuses are typically offered when an employee relocates for a new role or when they take a role that is difficult to fill. 

Signing bonuses can range in value. According to Intuit, entry-to-mid-level roles offer an average signing bonus of $5,000 to $10,000. For managerial or executive positions, signing bonuses can be as high as $40,000 to $50,000. Not too bad!

Pros: For an employee relocating, this is a great incentive. It shows that the employer is keen to have you as part of their team. This type of bonus also mitigates some of the stress that moving brings. 

Cons: When signing bonuses are offered for tough roles, an employee should do their research. Ensure that the company isn’t riddled with toxicity. Also, employees should read their contracts closely to ensure that the bonus doesn’t require them to stay if things don’t “work out” as expected. 

5. Spot Bonus

Spot bonuses are your small-but-mighty types of rewards. They can be discretionary or non-discretionary, depending on the occasion. 

These types of compensatory recognition reward employees who deserve special recognition. These small rewards are usually valued at around $50. These rewards are given to employees who go above and beyond, often outside of their designated role. 

Spot bonuses can be precious when used efficiently. These are the small tokens that show appreciation and recognition. Our advice to small business owners or companies with tight budgets? Give these milestone bonuses whenever you can. 

Pros: These bonuses increase morale and motivation. They allow employees to feel recognized for their work more often—especially at times when thousands of bonus dollars cannot be allotted. 

Cons: These are not the bonuses that shift an employee’s budget or help them pay off student loans. 

5. Retention Bonus

Similar to the signing bonus, a retention bonus is a one-time payment given to key employees. Retention bonuses are designed to keep important employees from seeking employment elsewhere. Typically, retention bonuses are often given during challenging or transformative business cycles, mergers, acquisitions, or organizational changes. 

Employers will also offer retention bonuses to current employees who have received other offers. As employee poaching is a fairly common practice among competitors, retention bonuses are used to keep employees happy with their current employer. 

Pros: This type of bonus shows that your employer depends on an employee, especially in times of upheaval. Aside from the bonus itself, this is a good sign that the same employee could ask for a raise after the merger. 

Cons: Challenging times in business can translate to long hours and enormous stressors for a single employee. When offered a retention bonus, an employee should consider negotiating a pay raise, as well. 

6. Year-End Bonus or Holiday Bonus

Ever wonder why everyone seems to buy a car around the December holidays? We’re only sort of kidding, but it might have something to do with this popular bonus. Sometimes called a holiday bonus or a Christmas bonus, year-end rewards are usually tied to performance metrics and milestones. 

Nearly 80% of employers hand out a bonus to employees at this time. This helps employees feel recognition for a year of hard work. 

Pros: Depending on the bonus size, an employee might finally be able to participate in Lexus’ “December to Remember” or “Happy Honda-days” and get a new set of wheels!  

Cons: This good-natured bonus can vary from year to year, especially when an employee doesn’t know the structure of the bonus. 

7. Referral Bonus

A referral bonus is paid to employees who “recruit” for their organization. When an employee successfully refers a candidate, they can receive referral bonuses after the new employee has stayed in the role for several months. 

The rate can vary, especially depending on the demand for the role. According to Recruitee, cash value for a referral bonus can range from $250 for an entry-level role to $25,000 for executive roles! However, the average referral bonus is often a one-time payment somewhere between $1,000 and $5,000 

Companies with referral programs are usually very clear about all stipulations regarding a successful referral, including: 

• How to refer an employee
• The size of the bonus 
• How long a new hire would have to stay in the role

Pros: Surveys have shown that employers rate referrals as the best source for generating dependable talent. Referred candidates are four times more likely to become hired. Of those, 45% of referral hires stay with an employee for over four years. 

Cons: There’s always the risk of employees referring friends or family members to find out that they don’t work well together. Referral programs can also involuntarily create a homogenous work environment. 

8. Non-Monetary Bonus

It’s almost a certainty that every employee would prefer a cash bonus over its non-monetary counterpart. However, sometimes this isn’t possible for an employer. 

The non-monetary bonus is a tricky one, but it can be done well to show an employee appreciation. 

Hey employers! The first rule of non-monetary bonuses is that they cannot replace a monetary bonus. When employees expect a year-end bonus in the form of a check, they will not be assuaged by “it’s the thought that counts” claims. 

Non-monetary bonuses can be thoughtful gifts, recognition, or extra paid vacation. A study by BambooHR found that one-third of employees would take rather be recognized in a company-wide email from an executive than receive a $500 bonus.

Pros: Any kind of bonus is a good way for an employer to show recognition.

Cons: It’s not cash.

Non-Monetary Bonus Ideas

• Extra PTO
• Gift cards 
• Thoughtful gifts
• Recognition 
• Paid trips 

BONUS: A Few Bonus Things to Think About

Yes, we’re ending this with a pun.

When entering into an agreement or negotiating a bonus, every employee should pay attention to these factors.

1. Taxes: As we went over, bonuses are pretty heavily taxed. If a bonus is part of a compensation package in lieu of a competitive salary, do the math. We have some calculators to help you out!
2. Fine Print: Some bonus structures appear too good to be true because they are. Make sure to read any/all fine print. Also, when starting a job where some of the compensation is performance-based, get everything in writing.
3. Look at All Benefits: Sure, that signing bonus looks delectable, but how about all of the other benefits? Make sure the entire benefits package looks good. Ensure that a signing bonus or annual bonus offer is not a Trojan horse distracting from bad health benefits or other red flags.
4. Always Negotiate: Always, When you’re offered a 7% bonus for every new client you onboard, ask for 10%. Especially when negotiating bonuses, always negotiate. This is your money, so make it count.
5. Return Policy: Finally, we got this tip from Intuit. Re-read that fine print. Make sure that you wouldn’t have to return your bonus in the case of a layoff or if you decide to leave the company before a certain date. These are also negotiable elements of an employment agreement.