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What Are Bonuses Exactly? A Guide for Team Leaders

Bonuses are an effective tool for recognizing hard work, motivating employees and retaining high achievers. Learn about different types of bonuses and when to give them to employees, and get answers to some frequently asked questions about bonuses.

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Why give bonuses?

Bonuses are a “win-win” incentive because they increase employee engagement and help companies reach goals by:

  • Driving productivity, sales and innovation
  • Boosting performance and efficiency
  • Improving team morale
  • Attracting top job applicants
  • Reducing employee turnover

What are bonuses for employees and which one should you give?

There are multiple ways to reward great employees who contribute to your company’s success. Here are some common bonus types to help you determine what’s best for your business and the achievements of your employees:


Annual bonuses are often based on yearly profits. They motivate employees to work hard, innovate and exceed goals because they actively share in their company’s success. This type of recognition and compensation can significantly impact a company culture, since it may change employees from paid labor to engaged, invested profit-sharers.


Incentive bonuses are rewarded to employees who attain specific, company-set goals. For example, an employer might give incentive bonuses for a certain number of sales, increased production of goods, or completion of projects on time or ahead of schedule. Incentive bonuses can be written into employment contracts or project agreements. They’re great for employees and companies because both parties benefit when goals are achieved.


Holiday bonuses make a huge impact. They convey warmth and appreciation, and reach employees at a costly time of year. Some companies award an extra month of pay or a set amount depending on the number of years employees have worked with their organizations.


Retention bonuses are given to employees who agree to stay with a company or a project for a given period. They are usually paid at the end of a calendar year or at the completion of an objective. Some companies offer retention bonus agreements that pay out every year an employee stays on. While specific stipulations may vary depending on the employer, in most cases, if an employee stays a full year but is then terminated or resigns at the 15-month mark, they’re entitled to a portion of the following year’s bonus.

Related: 13 Effective Employee Retention Strategies


Signing bonuses are given to employees when they sign contracts to work for or stay with a company. They help attract and retain quality talent. Sometimes referred to as sign-on bonuses, the time frame in which this type of bonus is paid out depends on the employer. For example, some companies pay signing bonuses the moment a new hire signs their initial paperwork or at the time of their first paycheck, while others may require employees to work a certain number of months before they give out the bonus, similar to retention bonuses. Extended waiting periods for sign-on bonuses are more common when the bonus is a large amount.


Spot bonuses are discretionary rewards given after a project or as recognition for individual or team success. They’re generally unexpected, which makes employees who receive them feel recognized and valued. Amounts can vary, depending on factors such as the type of work being rewarded and an employee’s time with the company. Additionally, spot bonuses are typically reserved for broader-based groups of employees as opposed to those in senior management positions.

How to implement a bonus program

Use these steps to create a bonus program for your employees:

List company priorities for improvement

What does your company need most? Profits or sales are good choices, but are there other company goals that will help achieve these? Do you need to attract new talent, retain high-performing staff or reward employees who are pushed hardest at year-end? Think about company goals, how employees can help achieve them and what types of bonus plans will help drive performance.

Think about what you can afford

Review your finances and allocate a portion of your budget to bonuses. This can be a set amount or a percentage of profit based on monthly, quarterly or yearly earnings. It’s also important to determine the best time for your company to give out bonuses and how often you plan to do so.

Assemble your leadership team

Take your ideas for types of bonuses, frequency, timing and your projected budget to your leadership team. It’s important to consider different performance measurements for all areas of the business and which bonuses will drive desired results.

Make a plan

Make a plan for managing the bonus program and make sure you get buy-in from your executive team, HR and any other stakeholders. Some important things to consider when writing your plan are:


  • When will bonuses be given out?
  • What will be the schedule for reviewing budgets, performance-based bonuses, etc.?

Managing performance-based reviews:

  • Who will review and approve performance-based bonuses?
  • What are the criteria?
  • Who will report the information for performance-based bonuses?

Announcements to employees:

  • Which bonuses will be announced to employees and how?
  • What details will be included in announcements?

Announce to employees

Announce the work bonus program to employees. If you’re announcing bonuses that apply to all employees, a company-wide email can be an effective, expedient method. For incentive and performance-based bonuses, it’s better to discuss with individual, eligible teams or have managers make announcements.

Related: How to Motivate Your Employees

FAQs about bonuses

Here are some commonly asked questions about bonuses:

Can incentive bonuses lower the morale of employees who don’t win?

It’s natural for employees to feel disappointed if they don’t achieve success. Your company culture, however, can make a big difference in how teams work with unachieved goals. For example, teams can still celebrate their efforts, discuss lessons from projects or brainstorm ideas to improve their performance the next time.

Are bonuses considered implied contracts?

Some bonuses, such as sign-on and retention bonuses, are viewed as implied contracts, and employers may be legally responsible for paying out promised amounts. If bonus models are outlined in written contracts that are signed by both the employer and employee, they must also be paid out per the legal contract terms. Discretionary bonuses are not usually seen as implied contracts, as they are awarded by choice without a specific timetable.

How do bonuses work for senior executives?

Senior executives are often entitled to company-based performance bonuses. The amount of a company-based performance bonus is determined by gauging the overall performance of all employees over a certain period of time and determining if the fiscal year was successful. If a company doesn’t have a successful year as defined by its board members, senior executives may not be entitled to a bonus. This bonus model also helps promote teamwork and encourages senior executives to work with all employees to achieve yearly goals.

What is a bonus called when there is no cash exchanged?

A bonus that doesn’t provide cash is called a non-cash or non-monetary bonus. Some examples include gift cards, gift certificates, free vacations and extra vacation days. Some companies also offer non-cash bonuses in the form of phantom stock, a type of stock that provides shareholders with a percentage of the business revenue if its value increases over a certain period of time.

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