Definition of Bonus
A bonus is a non-guaranteed payment that the employer can give their employees. This sum of money is not their regular pay — it’s an additional payment the employer can (but doesn’t have to) offer its employees.
What is a bonus?
Our HR glossary defines a bonus as a financial reward that any employer can give its employees once they have attained certain business goals and objectives. Usually, the business owner has already defined the parameters the employees must reach or exceed to earn the bonus. For example, if the employee:
- Manages to achieve goal Y, they will receive a bonus
- Doesn’t make X mistakes, they will receive a bonus
- Delivers X number of new clients and work, they will receive a bonus
Usually, bonuses follow guidelines that have been set by the reward and recognition programs of that company.
On top of that, the employer can give its employees a bonus for a variety of reasons, such as:
- Sharing the company’s success in the market
- Attracting great talent from the talent pool
- Boosting the morale of its employees by showing the appreciation the company has for its employees
- Retaining employees who are filling essential roles in the company
A bonus is not the same as an incentive or commission plan. Incentives and commissions are generally tied to performance as part of an employee’s standard pay. A bonus, however, is typically earned less frequently — monthly, quarterly, or annually.
Why is a bonus important to a small business and HR Leader?
A bonus system is essential for any small business or HR leader overseeing teams and employees. A bonus explicitly says to the employees what the company values. With that, the employees will know what the company expects from them, why, and how they will be rewarded.
There won’t be any kind of misunderstanding — the company expects X behaviors and results. So the employees will behave in a certain way and achieve those specific results to receive the rewards. In this case, the reward for the behavior is financial, a bonus.
So any business can use bonus systems to enhance, coordinate, and provide direction to employees. It’s a way for any small business to motivate its employees to do certain things and achieve specific goals.
This is a tried and tested method that works quite well even in large companies and enterprises.
What is the history of a bonus?
Bonuses have a long history. One of the first traces of it was from the Roman Empire. The Roman army provided a signing bonus to each new conscript in the service. The bonus, or as they called it, Viaticum, was usually a couple of gold coins that the volunteer received when they joined the army.
The Continental Congress did a similar thing in the Civil war, attracting volunteers with a cash “bounty” of only three dollars. In the late 1880s, the practice died out from the military but found its way into baseball. And after the 1950s, it was almost a standard practice in the business world.
Other similar terms to bonus that can assist you
- Compensation and pay practices are payments that the employer makes to their employees for services that the employee provides. The reward’s delivery vehicle can be monetary or non-monetary.
- The tax rate for bonuses. The tax rate for bonuses is usually a flat 22%, provided the rewards are under $1 million. After the bonuses exceed $1 million, the flat rate goes from 22% to 37%. Although the first $1 million in bonuses is still taxed at a 22% rate, the remaining funds above $1 million are taxed at a 37% rate.
Summary of a Bonus
A bonus payment is a non-obligatory payment that the employer gives its employees when certain standards or goals have been achieved. Bonus payments are essential to both the employer and the employees.
Employers motivate, retain, and attract employees with bonuses. Employees are satisfied, happy, and stay longer with the company if they receive bonus payments.
Similar glossary definitions you must know:
- Base salary. The base salary is the sum of money that the employee receives from their employer for the services done. The base salary doesn’t include anything outside their annual rate.
- Leave accrual. A leave accrual is the ability of the employee to accrue additional leave days. With a leave accrual, the employees can follow specific guidelines to get more paid time off (PTO) if they stay in your company.
- Annualized salary. An annualized salary helps the employer understand how much specific positions will cost the employer over one year. The employer will calculate how many annual hours the employee will be scheduled to work in a particular role and multiply that number of hours by the hourly rate to get the position’s annualized salary.
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