Pay & Salary

Types of Bonuses: Definition and How To Get One

July 2, 2021

If you are a working professional, you may earn both a base salary and an additional bonus. The amount of salary that you get is usually fixed, but for bonuses, the amount can vary depending on the bonus type. It's important to understand how bonuses work and how you can earn the bonuses available in your line of work. In this article, we look into what is a bonus, why employers offer bonuses, how it works, what are the different types of bonuses given and how to earn a bonus at work.

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What is a bonus?

A bonus is an additional income that you get on top of your annual pay. Employers offer different types of bonuses depending on the industry and type of job. Your offer letter or work contract typically outline your base salary and additional bonuses.

Employers offer bonuses to their employees for different reasons. It can be to express gratitude for their contribution to the company. Employers may also use bonuses to incentivise the employees to achieve a certain goal or target. Ultimately, bonuses are given, so the employees feel valued and cared for, which in turn can create a positive environment in the company and increase morale.

How do bonuses work?

Bonuses can be divided into two general categories, discretionary bonus and non-discretionary bonus. Discretionary bonuses are a type of bonus given at the discretion of the employer. Usually, the amount and timing of the bonus are not given in advance. On the contrary, non-discretionary bonuses are usually outlined in the job contract and the requirement to obtain the bonus is disclosed to the employee. A signing bonus is an example of a non-discretionary bonus.

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Different types of bonuses

There are different types of bonuses that you can receive from employers. Here are some of the common bonuses offered by companies:

Sign-on bonus

A sign-on bonus is a bonus that's offered when an employee agrees to sign a job contract. Signing bonuses may be given in one lump sum or spread over a certain time period, depending on the company's policy. This bonus usually requires that an employee stay with the company for a specified time period. It's also a way for the company to retain an employee upon hiring.

Performance-related bonus

Employers give a performance-related bonus to incentivise employees to meet a certain goal. Performance-related bonus is also given to the employee as a form of gratitude for your hard work. As the name suggests, the amount given for a performance-related bonus depends on how well you perform on your job.

Commissioned bonus

Commissioned bonus is usually given to employees working in sales departments. A commission is given as a percentage of the sales generated by the employee. You can also get a commission bonus if your sales team has met its target. Similar to performance-related bonuses, commissions are designed to motivate an employee to reach a certain number on their sales target. There are different types of commissions such as tiered commission or straight-line commission plan.

Spot bonus

Spot bonus is one type of discretionary bonus and is offered solely based on the company's decision. It's given if you are able to meet certain criteria set forth by your employer that are usually not disclosed in advance. For instance, you may get a spot bonus if you have helped the company with a special project or performed exceptionally and possibly beyond your job scope.

Referral bonus

A referral bonus is given when an employee refers a candidate to their company. The candidate may be required to pass the recruitment stage and work for the company for a certain amount of time. For roles that are harder to fill, employees may get a higher referral bonus. Companies that are aggressively hiring usually offer referral bonuses for multiple roles until the vacancy is filled. For instance, if you referred your previous coworker for a job that you know your company is recruiting for, you can be given a bonus after they work in the company for several months.

Overtime bonus

An overtime bonus is given if an employee works outside the office hours stipulated in the contract offer. Overtime pay is given on an hourly basis and is usually capped to a certain amount each month so that the scheme is not misused by employees. Overtime pay is only mandatory for employees with a monthly wage below $2,600.

Annual wage supplement (AWS)

The AWS is also called the 13th-month payment. This is because the amount of AWS bonus is equivalent to your one-month pay. The AWS is usually given at the end of the year on top of your total annual wage. However, it's not compulsory for an employer to pay an annual wage supplement. Employers may decide whether to give AWS and may lower the amount to be less than a month's pay if the company is not doing well.

Annual bonus

The name implies that this bonus is given annually. However, it differs from an annual wage supplement in that this is given based on overall company performance. An annual bonus is also called a profit-sharing scheme in certain companies because it's based on a certain percentage of the company's profits.

Retention bonus

A retention bonus is usually given when a company undergoes a big change. This usually happens during an acquisition, merger or restructuring. A retention bonus is offered to employees who are looking to leave the company in order to retain them.

Situational bonus

Situational bonuses are given only at a certain time of the year. Usually, this can happen around holidays and other big events. Situational bonuses are not mandatory, and the amount given depends on the company's performance during the year.

Stock options

Bonuses aren't always paid in cash. Stock options are one form of bonus given in the form of the company's share. Giving employees stock options ties the employee's interest with the company's and can motivate the employee to perform better at work. Stock option bonuses are mostly distributed by start-ups so that the employee can sell the stock that they own at a higher price if the company decides to go public.

Tips for earning a bonus at work

Read these tips to help you increase your chances of getting a bonus at work:

Improve productivity

One way to increase your chances of earning a bonus is by improving your productivity and efficiency. Find techniques that can help you focus at work and boost your performance, such as waking up earlier, or time-blocking your day. Increased productivity can lead to more quality work done, which can raise your chances of receiving a bonus.

Set goals

Setting goals can help you to see the steps to take to meet the criteria that qualify you for a bonus. This helps you to focus on the work that needs to be done to earn a bonus. It can also motivate you to outperform yourself and your past results.

Take initiative

Taking initiative is always a good quality. It shows that you have a sense of ownership for your work and demonstrates to your manager that you are able to lead yourself well. As employees are often rewarded for showing positive qualities, you can begin to take more initiative within and outside your job scope.

Communicate with your manager

You can directly communicate with your manager about the requirements to get a bonus and plan the steps that you can take to qualify for one. Talking to your manager also helps you identify areas where you may be underperforming to improve. Being open about what you want makes it easier to have future conversations related to your performance and compensation.

Keep a work journal

Keeping a work journal is useful to remember the projects and tasks that you've worked on in the past. During a meeting with your manager to discuss your bonus, you can refer to this journal to help you provide specific details that you feel can qualify you for a bonus. It also enables you to reflect on your work and see where you can improve to earn a bonus.

Ask for a bonus

If all else fails, you can always ask for a bonus. Be prepared to make a strong case for your proposal and ensure that you appear confident in your request. Keep in mind that some bonuses are non-negotiable and are entirely within your employer's discretion. If that is the case, respect your employer's decision.

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