When it comes to compensation, there’s more to consider than just base salary. In fact, that’s why it is called base pay; it is the initial salary paid to an employee. However, when it comes to total compensation, a job seeker or employee must consider base pay plus benefits, raises, stock options and bonuses. For many occupations, there are additional forms of compensation like overtime, on-call pay, pay for special projects and investment options.
Collectively, bonus pay is additional compensation beyond your base salary or hourly wage.
You may be asking yourself, “What are all of these other forms of compensation? And how do I get them?”
We’re here to help. Whether you’re happily employed but want to learn more about your current compensation, or if you’re talking to a recruiter about a role and are overwhelmed by all of the talks about numbers, here is a handy cheat sheet on the most common types of bonuses that top companies offer.
1. Annual Bonus
The most common type of bonus is given annually based on an employee’s annual base salary. Each employee is assigned a target bonus, in most companies, that reflects a possible bonus at the end of the year. If the company or manager determines that an employee, a.k.a. you, have achieved certain individual goals, the annual bonus will be given. The key here is that the company or department needs to also achieve certain business performance results in order for the annual bonus to be paid out.
As with most bonuses, the amount of the annual bonus or the percentage can vary between departments and positions, and is determined by the company’s leadership and HR teams.
2. Signing Bonus
A signing bonus — or what some companies like Amazon call a Sign-On Bonus— is a one-time payment to a job applicant who is highly desired by a company recruiter. Think of this as an attractive carrot that a recruiter or company may offer you in order to get you to join the company.
You may be offered a signing bonus if:
- You’ve negotiated for a salary of $100,000, but the recruiter can only offer $90,000. You may be offered a signing bonus of $10,000 to make up for the gap.
- You have competing offers from another company.
- The company is poaching you from another top company and needs to cash out the stock options that you’re leaving behind.
It’s important to note that usually signing bonuses come with a requirement that you, the employee, stay with the company for at least 6 months or a year.
3. Spot Bonus or Discretionary Bonus
If you’ve achieved a major goal or demonstrated exceptional performance, you may qualify for a spot bonus. Alternatively called a discretionary bonus, these can be three- or four-figure bonuses at some companies, and reward performance beyond explication. Usually, managers or executives have discretionary funds with which to reward employees who have made a significant impact on the business.
These spur-of-the-moment gifts recognize outstanding performance and can be a great motivational tool, especially during difficult times. Note, some employers may also grant spot bonuses in the form of gift cards or additional PTO.
4. Retention Bonus
Retention bonuses reward employees for staying with the company for a long period of time. These are also used to retain high-performing employees especially when there is a hot job market. As employee poaching has increased in recent years, many companies offer retention bonuses to keep employees from jumping ship to a new job.
Typically a retention bonus is a one-time payment, and many companies prefer these over a salary increase because they may not have the necessary finances in place to commit to a long-term raise.
5. Referral Bonus
According to the U.S. Office of Personnel Management, “A referral bonus is an award given to an employee who helps the agency recruit new talent by referring someone for an advertised, hard-to-fill vacancy (i.e. after the vacancy has been announced for open competition through proper channels). A referral bonus may be paid after that person is hired by the agency and performs successfully in the job.”
Simply put, referral bonuses are for current employees who help recruit a new employee and vary depending on a few factors:
- Role: Some roles like engineers garner a higher referral bonus for employees
- Difficulty to Hire: If a company decides that a role is likely to be difficult to fill, they may up the incentive or the bonus.
- Diversity: Companies like Intel challenge its employees to refer more diverse candidates and rewards employees who refer a woman, underrepresented minority or veteran.
6. Holiday Bonus
As the name suggests, a holiday bonus is given out during the winter holiday time and can be a way that a company tries to thank employees for a successful year’s work. Holiday bonuses can be any size and often increase employee productivity, retention and motivation. In many cases, a company will tie a holiday bonus to individual employee performance and may tell you what you did that led to the reward, whether that be taking on a stretch assignment, beating sales goals or exceeding other key performance indicators (KPIs).
7. Profit-Sharing Bonus
Unlike an annual bonus, a profit-sharing bonus awards employees a percentage of the company’s profits and is based on the company’s actual earnings over a set period of time. Employees only benefit from this type of bonus when a company sees a profit.
The company contributes part of its pre-tax profits into a pool that is distributed among eligible employees. The amount distributed to each employee then depends on salary and title. This bonus can either be shared in the form of stocks or a cash amount.
In 2020, Delta Air Lines decided it would pay its 90,000 workers $1.6 billion in profit-sharing bonuses. Full-time and part-time workers received the checks, while executives are said to be receiving their own performance-based bonuses.
Most popular amongst sales teams, commission plans are based on the amount of money or revenue a salesperson earns in the sales they have made. Commissions complement a base salary and are very clearly defined at the top of the year through a sales commissions structure. This outlines how much the company will pay its salespeople for each sale.
According to HubSpot, there are a few different types of Commission structures:
- Base Salary Plus Commission: With this plan, salespeople are provided a base salary with commission. The standard salary to commission ratio is 60:40, where 60% is fixed and 40% is variable.
- Absolute Commission Plan: This is when a commission is paid as a result of engaging in specific activities or meeting specific goals. For example, a salesperson might be paid $1,000 for each new customer.
- Relative Commission Plan: The relative commission plan is when a target or quota is set. Let's say a salesperson has a quarterly quota of $90,000 and a quarterly commission of $10,000. If they meet 85% of the quota, they'll receive 85% of the commission.
- Territory Volume Commission Plan: With this commission structure, salespeople work with clients in clearly defined regions. And they're paid on a territory-wide versus individual sale basis.
- Straight-Line Commission Plan: A straight-line commission plan rewards salespeople based on how much or little they sell. For example, if they reach 90% of their quota, they receive 90% of their commission
- Tiered Commission Plan: A tiered structure encourages reps to put in extra effort by providing higher commission as they hit substantial sales milestones. Here, reps could be paid increasing commissions as they meet their quota, exceed their quota, and continue to close more deals than they’re expected to.
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