What Is a Fair Bonus Percentage for Employees?
Depending on your line of work, bonuses can be a significant part of how you get paid at work or be an occasional surprise. Bonuses reinforce the relationship between employee performance and pay by setting performance expectations and rewarding people who meet those standards. Companies use different types of bonuses depending on how they hope to motivate their employees.
In this article, we explain the different types of bonuses and how they can influence your compensation at work.
What is a bonus?
A bonus is an employee’s additional pay on top of their regular salary or hourly pay rate. They may be based on unique incentive programs, built into employment contracts or based on profit sharing. Many companies have bonus programs outlining the specific details that qualify employees to receive a bonus, while others might give an annual bonus to all employees at a company.
Each business can determine how frequently to give out bonuses and how much they should be, so it’s important to understand your company’s policy to fully understand how you will be compensated before accepting a job.
Why do companies give out bonuses?
Companies give bonuses to motivate employees, boost morale and encourage quality performance. Rewarding employees for doing well helps them see a physical indicator that their work influences their compensation. A small boost to a paycheck can be a huge motivator for employees, who often see bonuses as recognition for their efforts. When employees feel appreciated, they often become more invested in their workplace and can get more satisfaction out of their job.
Businesses also offer bonuses to their employees to remain competitive as prospective employers look to hire the most qualified candidates. A candidate choosing between two similar employers may be more interested in onenthat offers generous bonus opportunities. A bonus structure also attracts motivated candidates who want to take advantage of the opportunity to put extra effort into their job and earn more money.
How do bonuses work?
Each company’s bonus program works differently, but some general guidelines and best practices inform how a company gives out bonuses. Bonuses can be built into a company’s overall budget in a discretionary fund or determined by your department’s overall success. Some bonuses have multiple criteria, including a company’s financial success, your team’s performance and your individual evaluation results.
Businesses may set minimum expectations to receive a bonus, or they might only give bonuses to people who put in extra effort to be top employees. These expectations can include increased profits and sales or non-monetary guidelines like customer satisfaction and positive feedback from coworkers.
Related: Discretionary vs. Non-discretionary Bonus: Everything You Need to Know
What is the average bonus percentage?
The amount you can earn from a bonus has a wide range depending on the type of bonus and your level of seniority. While entry-level employees may not be eligible for a bonus, executives may receive compensation over 100% of their yearly salary. Professionals in sales positions may rely on bonuses to make up most of their paychecks. Likewise, people who work for nonprofits rarely get bonuses due to limited budgets and a lack of profit opportunities.
Bonuses can also add up over time. A 2% bonus may combine with others like an annual bonus, a holiday bonus and random incentive bonuses to add a significant amount to your overall compensation.
What are the types of bonuses?
Research the types of bonuses your company offers to understand the appropriate expectations for getting a bonus in the workplace. There are several situations where employers commonly give out bonuses, although some companies may implement bonuses on a completely case-by-case basis. The most common types of bonuses include:
Annual
One of the most common types of bonus is an annual bonus, which employers give out once a year. Annual bonuses are usually based on your overall performance, although companies who use profit-sharing rewards may distribute bonuses based on company success and profits. Annual bonuses motivate employees to stay with a company throughout the year, giving everyone something to look forward to and providing an incentive to maintain a consistently good quality of work.
Annual bonuses have a wide range in average amounts and can vary yearly. You may get a bonus one year but nothing the next, so be sure you understand how your employer selects people to receive a year-end bonus. Executives receive higher bonuses that can multiply based on performance, while most employees earn bonuses equal to 1% to 5% of their overall salary.
On-the-spot
An on-the-spot or spot bonus is a one-time bonus to reward exceptional work in unique circumstances. Employers use spot bonuses to compensate for extra work and reward people who show ambition and motivation. The amount of a spot bonus is usually up to the discretion of your manager and is likely to be smaller than other types of bonuses.
On-the-spot incentives are usually much smaller than other types of bonuses because they occur on a case-by-case basis instead of factoring into a regular budget. A spot incentive is usually less than 1% of your yearly salary and may even be under a quarter of a percent.
Signing
Another common one-time bonus is the signing bonus, an extra amount you earn as a reward for joining a company. Signing bonuses are typical when a business is trying to recruit someone with a particular skill set or hoping a candidate will relocate to work for them. Companies use signing bonuses to offset any costs of changing positions and transitioning into your new job.
Signing bonuses incentivize a candidate to accept a job, especially if that company can’t offer a more competitive salary due to ongoing budget constraints. Your signing bonus might be a flat amount offered to all new employees or a salary percentage ranging from 5% to 25%.
Read more: Sign-On Bonus: Definition and Negotiation Tips
Retention
Employers give out retention bonuses to show appreciation for employees who stay with their company. Positions with a high turnover rate might offer retention bonuses after a certain time, encouraging new employees to work through a difficult training period and spend time acclimating to their job.
Retention bonuses are also common during company mergers or organizational changes. To keep business running smoothly and allow new employees to be properly trained, some employers may also offer a retention bonus if someone in a key role is planning on leaving. Because retention bonuses directly influence staffing transitions, they can be quite significant at 10 to 15% of an overall salary.
Referral
Beyond retaining great employees, companies use bonuses to attract new talent. Many businesses have a referral system that rewards employees if they bring in qualified applicants for an open position. Employers usually give out referral bonuses after the new employee has demonstrated they can succeed in the role for several months. While some referral programs have a flat rate for every employee, companies may offer a larger referral bonus for roles that are difficult to fill or have unique requirements.
Occasionally, referral bonuses extend to the current employee and the referred person. This means that the new employee and whoever suggested them for the job would receive a bonus after a certain period. Referral bonuses are usually a flat amount ranging from a few hundred to a few thousand dollars.
Holiday
Employers give holiday bonuses to support their company culture and give employees additional compensation to pay for holiday expenses. Spending extra on payroll during expensive holidays shows employees that their employer values their time and appreciates their work. Some employers give everyone at the company a small monetary gift, while others pay out a percentage of their salary, usually ranging from 1% to 10%, depending on seniority. Some businesses may combine holiday and annual bonuses, increasing the percentage significantly.
What is the difference between bonus and commission?
Bonuses and commissions are both additional pay that employers add to your standard salary, but they do have some key differences. Often, a commission is built into an employee’s pay structure, understanding that their performance determines how much they get paid. Employees who work on commission usually receive commission pay with every paycheck, and the amount they earn directly correlates to the profits they bring to their employer.
How do I know if my bonus is fair?
Ensure that your bonus is fair by researching an employer’s bonus structure before accepting a position. In the final round of interviews, or whenever you discuss compensation with a potential employer, ask directly about how bonuses work. Pay attention to how much of your salary would be a bonus and the standards to earn each bonus. You can also research other companies within your field to give you an idea of the compensation different businesses offer.
If a company offers a large bonus package, ensure you understand all the qualifications needed to earn it and any items that may keep you from achieving it, such as base salary. Consider how the amount compares to your base salary for one-time bonuses like signing bonuses. Negotiating for a higher starting salary as opposed to a large lump sum bonus may be worthwhile, especially if you hope to grow at a company for a long time.