Bonus
A bonus is a non-guaranteed payment that the employer can give their employees. This sum of money is not their regular pay — it’s an additional payment the employer can (but doesn’t have to) offer its employees.
What is a bonus?
A bonus is a financial reward that any employer can give its employees once they have attained certain business goals and objectives. Usually, the business owner has already defined the parameters the employees must reach or exceed to earn the bonus. For example, if the employee:
- Manages to achieve goal Y, they will receive a bonus
- Doesn’t make X mistakes, they will receive a bonus
- Delivers X number of new clients and work, they will receive a bonus
Usually, bonuses follow guidelines that have been set by the reward and recognition programs of that company. The employer can give its employees a bonus for a variety of reasons, such as:
- Sharing the company’s success in the market
- Attracting great talent from the talent pool
- Boosting the morale of employees by showing appreciation for their contributions
- Retaining employees who are filling essential roles in the company
A bonus is not the same as an incentive or commission plan. Incentives and commissions are generally tied to performance as part of an employee’s standard pay. A bonus, however, is typically earned less frequently — monthly, quarterly, or annually.
Why is a bonus important to a small business and HR leader?
A bonus system is essential for any small business or HR leader overseeing teams and employees. A bonus explicitly communicates to employees what the company values. With that, the employees will know what the company expects from them, why, and how they will be rewarded. There won’t be any misunderstanding — the company expects certain behaviors and results, so the employees will act accordingly to receive the rewards. Any business can use bonus systems to enhance, coordinate, and provide direction to employees. It’s a way to motivate employees to do certain things and achieve specific goals — a tried and tested method that works even in large companies and enterprises.
What is the history of a bonus?
Bonuses have a long history. One of the first traces of it was from the Roman Empire. The Roman army provided a signing bonus to each new conscript in the service. The bonus, or as they called it, Viaticum, was usually a couple of gold coins that the volunteer received when they joined the army. The Continental Congress did a similar thing during the Civil War, attracting volunteers with a cash “bounty” of only three dollars. In the late 1880s, the practice died out from the military but found its way into baseball. After the 1950s, it was almost a standard practice in the business world.
The tax rate for bonuses
The tax rate for bonuses is usually a flat 22%, provided the rewards are under $1 million. After bonuses exceed $1 million, the flat rate increases from 22% to 37%. Although the first $1 million in bonuses is still taxed at a 22% rate, the remaining funds above $1 million are taxed at a 37% rate.
Summary
A bonus payment is a non-obligatory payment that the employer gives its employees when certain standards or goals have been achieved. Bonus payments are essential to both the employer and the employees. Employers motivate, retain, and attract employees with bonuses. Employees are more satisfied, happier, and tend to stay longer with the company when they receive bonus payments.
