Bonus: Definition, Different Types, and FAQs

What is bonus in salary?

A bonus is money given to employees by their employers in addition to their regular pay as a reward for work well done or for any other reason that fits with the company’s payroll policy. In certain businesses, incentives are given to all staff on holidays like Diwali. By boosting employee morale and motivating them to achieve their objectives, bonuses for employees help businesses be more productive. Companies give bonuses to employees as a way to recognise their contributions or to express gratitude.

Whether or whether a bonus payment meets specific requirements determines whether it is discretionary or nondiscretionary. Bonuses that are awarded at random to employees that they did not request are known as discretionary bonuses. Such a bonus may be offered to an employee who performs very well. Nondiscretionary bonuses, on the other hand, are those that are granted to employees in accordance with their promises.

Types of Bonus:

Bonus as a part of an employee CTC depends on various factors such as company policies, industry standards and the employee contract. The bonus structure depends on the following:

• Profit Sharing bonus: the employer distributes a certain percentage of their company annual or quarterly profit as bonus to their employee, usually based on their annual salary. Some companies offer the bonus as cash payouts while others could provide it as surplus in their retirement plans. 

  Profit sharing bonuses are often implemented to give a sense of ownership to the employee that their work positively and actively contributes to the growth of the company. It not only boosts employee engagement but also boosts employee motivation to work hard in achieving organizational goals.

• Gain Sharing Bonus: Gain sharing bonus is where an employer pays bonuses based on the financial gains or improvement in the productivity and efficiency within the organization. Unlike profit sharing which depends on the profit of the company, in gain sharing an employee focuses on specific gain achieved through collaborative efforts and improvement in achieving employee goals. 

  This bonus is a variable bonus and depends if the employee organization meets or exceeds the performance target. The higher the productivity the higher the bonus. This bonus challenges employees to work harder, improve efficiency and produce better results.

• Spot Bonus Award: Also referred to as the on-the spot bonus is a form of recognition where employees are rewarded for their exceptional performance or achievement beyond their job responsibilities. Unlike traditional bonus programs which are rewarded quarterly or annually this is given spontaneously after the employee outstanding performance occurs. 

  Spot bonuses are often discretionary and to provide a spot bonus to employees depends on the discretion of the organization. Because of its flexibility this is provided to boost employee morale and motivate others to work hard. This also encourages employees to showcase a continuous focus on achieving a high standard of performance. The criteria for spot bonus may vary from organization to organization. Most of the time it is based on voting the best employee in a team or through nominations.

• Non Cash Bonus: As the anime suggests non cash bonus is non monetary in nature even though employees are entitled to a reward for their exceptional performance this might not contain a cheques or any gift card. This bonus can take many forms and is designed to provide employees with unique benefits. Some of the common non cash bonus includes:

1. Travel Package: providing vacation package, airline tickets or weekend getaways to employees.
2. Merchandise: Employers also offer gadgets, apparels or accessories to employees.
3. Health and wellness benefits: rewards like gym membership, wellness program or access to fitness centers.
4. Charitable contribution: sometimes companies offer to make donations on behalf of the employee to a charitable organization of their choice.

• Project Bonus: Also known as project performance bonus or project completion bonus are bonuses awarded to employees on project-per-project basis. This bonus is given to  employees or teams for successfully completing a project.
  
  This type of bonus is designed to recognize and reward employees for their contribution to the successful execution of a project and meeting project goals and delivering exceptional performance and results. The bonus amount depends on the complexity of the project which includes the time frame of the project, staying within the budget and achieving high quality deliverables or meeting client expectation.
• Task Bonus: A task bonus is a form of incentives or rewards provided to individual employees upon the completion of a task within a larger project. This task incentive is more granular in nature compared to others which are tied to a completion of a project and is focused on specific assignments or objectives.
  
  The bonus amount may vary based on the complexity of the task or the level of success achieved in a project as well as the difficulty of the project. Important and challenging tasks may warrant high rewards. The task bonuses are awarded to employees or teams and can be both monetary and non-monetary in nature. These rewards are provided promptly and are focused on reinforcing positive behavior as well as achieving a positive sense of  accomplishments. 
• Sign-on Bonus: also known as hiring bonus is one time payment given to new hires by employers to attract and entice qualified candidates to join their organization. Sign On bonuses are typically provided as lump sum or installments and are separate from company salary and are included in the CTC. This bonus is often used to secure the commitment of the new joinees and compensate them for their decision to join the company. 

  Sign On bonus is part of the negotiation process during the hiring stage and is often used to sweeten the deal and secure the acceptance of a job offer. This bonus are taxable income and the employer is responsible for paying these taxes on the bonus amount. Sign On bonus may come up with a retention clause requiring the employee to stay within the company for a specified duration minimum 1 year  to be eligible for bonus. Sign on bonuses are often provided to executive or high-level positions; they can be provided to everyone across all levels and industries to attract in-demand skills.

• Attendance Bonus: Is a form of bonus program awarded to employees who maintain a regular and punctual attendance at work, reach on time and exit office on time. Attendance bonus is typically a fixed amount or a percentage of salary. This bonus is awarded to employees monthly, quarterly or annually based on the company attendance policy.
  
  The main goal of the attendance bonus is to motivate employees to consistently work and be punctual which helps reduce absenteeism and improve overall work productivity. This bonus is prevalent in industries like restaurants, hotels and pharmacies which are open throughout the year and during festivals and holidays.
• Referral Bonus: Referral bonus as the name suggests is awarded to employees when they refer qualified and exceptional talent to the organization. This bonus is provided only when the referred candidates actually join the organization and complete their probationary period in the organization, mostly around three to six months. The bonus is paid lump sum or installments 

  Referral bonus can be a fixed amount or variable based on factors like the level of position and the scarcity of the skills or urgency to fill the role. This bonus is provided to help organizations to hire talented as well as trusted employees from verified sources. This motivates employees to become brand ambassadors of the company helping to attract talent through their networks.

• Holiday Bonus: as the name suggests it is a special bonus program given by employers to employees during the holiday season typically at the end of the year. Startups are using this bonus as an opportunity to motivate employees to take a break from their hectic schedule and prevent any cases of burnout in employees. This helps employees rejuvenate and come up with fresh minds and good health after the break. 

  Typically holiday bonuses are distributed to employees at the end of the year, often in December. The exact timing can vary from company to company and some companies may choose to provide this bonus in conjunction with other holidays.

• Sales Commission: it’s an additional incentive provided to sales people which is over and above their regular sales commission. While standard commission is calculated based on percentage of the sales revenue generated, a sales commission bonus represents an extra reward for exceeding their sales target.
  This acts as an incentive for sales people to make more sales and put an extra effort in bringing new clients for the business. The commission depends on various factors such as type of product and services, the complexity of the product and sales process and the overall sales strategy.
• Gift Cards: a gift card is a type of bonus or incentives provided to employees in the form of a gift card. This option allows employees to have a choice on how to redeem their rewards by providing them with a gift card that can be used by various retailers or establishments. This gifts card can be used in various cases such as employee recognition program by integrating with your hr software where employers can give points to hardworking employee which they can redeem as gift cards later or this can be us in promotional campaign to encourage employee behaviors such as making a purchase during a sales or online events, referring an employee or participating in a surveys. This can be distributed physically via employee kits as well as electronically through emails.
• Annual Bonus: annual bonus as the name suggests is a lump sum payment given to employees at the end of the year. Unlike regular salary this is a one time payment based on various factors such as employee performance, achievement, financial goals and target mets. This bonus is provided to employees to incentives and boost employee morale for their hard work and contribution to the organization goals.
  Annual bonus is a form of variable compensation which varies from year to year depending on the performance of the employee and profitability of the company.

  Special Considerations:

• Bonuses in lieu of pay: in this employer instead of paying higher wage or salary to employees they pay them bonus as the primary form of compensation to employees. Using this employers can keep a wage low by pledging to compensate them in the form of bonuses. As a result they can withhold the bonus during a slow year or recession and keep their fixed cost low. This is used by employers as a viable option rather than increasing salary annually so as to cut wages in times of recession.
• Dividends: dividends are a portion of company profit that is distributed to shareholders which act as a return on investment for shareholders. They are distributed periodically or quarterly and are subjected to taxes. 

  There are two type of dividends:
  1. Cash dividends: as the name suggests, a cash company distributes cash to its shareholders on a per-share basis.
  2. Stocks dividends: In this shareholder receive additional stock instead of cash for their investment.

• Bonus shares: Bonus shares as the name suggest companies offer additional shares to an existing shareholder without any additional cost. For example if a company offers 1:1 bonus shares it means for every 1 share a shareholder he will get an additional 1 share if he has 100 shares he will get another 100 shares as bonus. These shares increased the total number of outstanding shares but do not affect the company market capitalization.

Do Bonuses Count As Salary?

Bonuses are considered as compensation for over and beyond employee base salary. They are treated more like an additional income and depend on how they are structured in the company policies. 

Why Do Companies Give Bonuses?

Here are some of the reason for giving bonuses to employees:

• Reward performing employees: bonuses are often used as a way of rewarding and recognizing hard working employees for their exceptional performance and their contribution in the growth of the company.
• Encourage employee productivity: Bonus can be used as an incentive to boost employee productivity and encourage them to perform their best or to achieve their goals. 
• Alignment towards company goals: bonuses are tied to company goals which help employers to plan and strategize efforts of the employees towards achieving organization goals and contribute to the success of the organization.
• Retain key employees: companies offer retention bonuses to leaving employees to encourage them to stay with the company especially during recession since it will be difficult for them to hire new talents and extra cost of training and development of the employees.
• Attract top talents: bonus as joining bonus are always used to attract talented individuals to join the organization. A bonus acts as an incentive to accept a job offer especially in case when talents are being aggressive in wanting more salary and also set apart from their competitor.
• Profit sharing: some companies implement profit sharing programs with their employees as a bonus to create a sense of shared success and alignment of employee interest with the financial health of the organization.

Who is eligible for a bonus?

In India every employee is entitled to bonus as per ” THE PAYMENT OF BONUS ACT, 1965″ provided he has worked in the establishment for not less than 30 days in a year.