An employee bonus is paid in addition to your base salary — it’s a way for the employee to make more money and for the employer, it’s an alternative to a raise or promotion to recognize and reward staff. There are different ways to structure a bonus. Understanding the different options can help you better negotiate a bonus for yourself.
Bonuses vary based on when, how and why they are paid. Here are six types of employee bonuses and how they work:
A bonus can be paid on an ad hoc basis as a spot bonus, or on a regular cadence such as quarterly or annually. For the employer, the time flexibility of a spot bonus enables managers to respond more immediately to situations that warrant a bonus. For example, an employee goes above-and-beyond, landing a big client or initiating a cost-saving process, so the employer grants a spot bonus to spotlight that accomplishment. In a tight labor market, a spot bonus might be given to retain key employees (this type of bonus is more specifically called a retention bonus). For employees, a spot bonus can be a welcome surprise, but also a negotiation tactic to keep in mind for extra compensation in-between raise cycles or when there is a salary freeze.
A year-end, quarterly or otherwise scheduled bonus is paid out on a timetable that is established in advance. This bonus is built into the compensation package (e.g., $100,000 base salary plus a 10% bonus paid out at year end). The bonus might be quoted in dollars or as a percentage of salary. It might be a guaranteed amount or fluctuate (I’ll cover the reasons for the fluctuation in the “Why” Bonuses). Compensation for management positions frequently include scheduled bonus payments. Start-ups that can’t afford competitive base salaries frequently structure scheduled bonus payments to offset the lower salaries. In certain industries, such as investment banking, and roles, such as sales, the compensation packages are structured to emphasize bonus over base salary.
Bonuses are commonly paid in cash and included with your paycheck for that week or in a separate check. However, bonuses can also be paid out in non-cash form. For a holiday bonus, an employer might give out gift cards or tangible gifts, like a fruit basket or spa items. For a scheduled bonus, it might be structured as stock options or equity, instead of outright cash. Yes, options or equity are convertible into cash, but there may be restrictions on how quickly you can sell. A typical timetable is to have the option or equity grants vest over three to five years. This acts as a retention tool, and it also encourages employees to maintain a longer-term focus to ensure the company value — and therefore the options or equity value keeps rising.