Companies offer bonuses to attract candidates for employment, retain, motivate, and reward employees, and increase productivity. There are many different types of bonus plans employers can use to incentivize employees. What companies offer will depend on the company policy and the job you’re working at. Review information on the types of bonuses companies offer to new hires and employees, how to find companies that offer bonuses, and tips for evaluating bonus plans in a job offer.
What Are Bonuses?
A bonus is additional compensation beyond your regular base pay. Employers may award bonuses based on performance, tenure, company profitability, or other factors. Companies also use bonuses to attract new hires. There are many different types of bonuses, but most fit into two main categories: production bonuses and nonproduction bonuses.
Production Bonuses
Production bonuses are based on exceeding goals or quotas. For example, if you are required to complete a project in six weeks and you finish in five, your employer might award a bonus for reaching your goal in less time.
Nonproduction Bonuses
Nonproduction bonuses are awarded independently of production goals or individual productivity. This type of bonus is meant to reward, recognize, or incentivize employees. Examples of nonproduction bonuses include retention, signing, holiday, referral, longevity, and profit-sharing. Your employer may also choose to give you a bonus in lieu of benefits if you decline company-sponsored health care coverage.
Why Do Employers Offer Bonuses?
Employers aren’t required to offer bonuses. Federal employment law is governed by the Fair Labor Standards Act (FLSA). It sets the minimum wage and requires employers to pay overtime, but it does not require them to offer variable pay like bonuses. However, many employers offer extra compensation anyway. According to the Bureau of Labor Statistics (BLS), 44% of private-industry workers who worked for companies with 100 or more employees had access to nonproduction bonuses in 2020. Employers offer bonuses to provide extra pay and to reward employees, as well as to increase profitability.
Provide Additional Pay
Offering bonuses allows companies to provide additional pay without committing to a permanent salary increase. Because this type of compensation doesn’t raise base pay, it avoids increasing the employer’s overall compensation budget on an ongoing basis.
Reward Employees
Studies have shown that bonuses are effective at rewarding and incentivizing employees. A Harvard Business School and Yale School of Management study showed that bonuses tied to sales goals inspired sales teams to meet or exceed their quotas. Quarterly bonuses were even more effective than annual ones. Other research has shown that profit sharing can increase job satisfaction as well as productivity.
Increase Profitability
Companies award bonuses to encourage employees to engage in behaviors that lead to increased profitability. For example, an employer might offer a hiring bonus to entice candidates to accept a job at the company or a longevity bonus to induce employees to stay with the organization for a set period of time. Referral bonuses incentivize recommending skilled candidates for hard-to-fill roles, while task or mission bonuses reward achieving goals.
Types of Bonuses
Although the FLSA doesn’t require employers to pay bonuses, it does regulate how they factor into compensation. From an FLSA perspective, there are three types of bonuses: discretionary bonuses, nondiscretionary bonuses, and gifts.
Discretionary Bonuses
Discretionary bonuses are extra payments that the employer chooses to make (meaning that they are not required by an employment contract or collective bargaining agreement). Employers can exclude discretionary bonuses from the regular rate of pay. If you’re an hourly employee who is eligible for overtime under the FLSA, discretionary bonuses don’t count toward your base pay. This means that you’ll receive overtime based on your hourly rate, not your hourly rate plus your discretionary bonus. Examples of discretionary bonuses include:
Referral bonuses (provided that you don’t work in HR and your participation is voluntary)Spot bonuses that don’t adhere to preset standardsEmployee recognition bonuses, such as employee of the month
Nondiscretionary Bonuses
Nondiscretionary bonuses are compensation based on a contractual agreement or predetermined criteria. Employers must include nondiscretionary bonuses when they determine overtime pay. If you’re an hourly employee who is overtime-eligible, nondiscretionary bonuses count toward your pay when figuring out overtime. This means that you’ll receive overtime based on your hourly rate plus your discretionary bonus. Examples of nondiscretionary bonuses include:
Attendance bonusesSafety bonusesProduction bonuses that are determined according to a set formulaBonuses that are stipulated by an employment contract
Gifts
Gifts are bonuses that are paid on special occasions such as holidays or anniversaries with the company. Generally, this type of bonus isn’t included in your regular pay rate, which means that if you’re eligible for overtime, the bonus won’t be included in the calculation of your overtime pay. Examples of gifts include:
Service or tenure awards Sign-on bonuses Holiday pay
Employers That Offer Bonuses
Forty percent of private-sector employees work for companies that offer nonproduction bonuses, according to data from the BLS. But some industries are more likely to offer this type of compensation than others:
Information: 69% of workersFinance: 65% of workersManufacturing: 55% of workersProfessional and business services: 43% of workersConstruction: 41% of workers
Higher-paid workers are more likely to earn bonuses than lower-paid ones, per the BLS. The top quartile of workers was twice as likely to earn nonproduction bonuses as the bottom quartile of workers.
How To Find Companies With Bonus Plans
Companies that offer bonuses rarely keep it a secret. They publicize anything that makes them a competitive employer. In addition to paying attention to news stories about employers in your industry, you can find companies with bonus plans by looking in the following places:
Company career websites: Most employers have career pages on their corporate sites. Those that offer bonus plans will usually tell you in their job listings. Job boards and job search engines: Sites such as Indeed, LinkedIn, and Google for Jobs will let you search by keyword. Add “bonus” to your searches to find employers offering variable pay in your area.Employer research sites: Glassdoor provides employee reviews of companies, plus compensation breakdowns that include bonuses.
How To Evaluate a Bonus in a Job Offer
If you’re comparing multiple job offers, remember that bonuses are usually less certain than regular pay. A hefty signing bonus may not make up for a below-market salary if you stay at an organization for many years. Discretionary bonuses may dry up during tough times. Evaluate each job offer based on its merits and get all terms in writing. Keep in mind that benefits such as excellent health insurance or a decent 401(k) match may be worth more than a bonus, especially one that is not recurring or guaranteed.
