7 Types of employee bonuses and how they work

Bonuses are a beautiful thing. Whether you’re sweetening a job offer, showing appreciation for meeting goals, or sharing company earnings, bonuses can play an important role in attracting and retaining quality employees. However, navigating the various types of bonuses and when to use them can get complicated.

That’s why we’re here. We’re breaking down the different types of bonuses, and how to best use them.

1.  Sign on bonus (signing bonus)

When hiring top talent, you want your job offer to be competitive. A sign-on bonus is the cherry on top, making your job offer even sweeter. It’s a one-time payment, and it’s used in a variety of situations:

  • If your applicant has multiple job offers from other companies, and you want to make your offer more competitive
  • If you’re competing with an offer from another company
  • If you can’t offer the desired salary of the applicant, you can offer a sign-on bonus to help make up for the gap (e.g. If the applicant asks for 120K and you can only offer 100K, you can offer a sign-on bonus of 20K)
  • If you’ve recently hired a new employee and want to establish goodwill
  • If you’re buying out any compensation from a previous employer

In return, sign-on bonuses usually require the employee to stay with your company for at least six months to a year. Larger sign-on bonuses can also be paid over a period of up to a year to protect your company’s interests.

2.  Retention bonus

Whereas a sign-on bonus brings talent on to the team, a retention bonus is used to keep them on the team. This is typically a one-time payment that rewards high-performing employees and/or employees who have worked with the company for a long period of time.

With data at their disposal, employees have become more empowered than ever at leveraging their job searches and negotiations. It’s no longer just about headcount; employers must pay competitively in order to attract what they need. Retention bonuses are an impactful way to show employees they are valued—and keep them from jumping ship for a new opportunity. A retention bonus can also be used in lieu of a salary increase if a raise is not possible at the time.

A retention bonus can be delivered as a lump sum or divided over a period determined in the contract. As for the amount, this varies; the average retention bonus is between 10-15% of an employee’s base income.

3.  Annual or year-end bonus

 An annual or year-end bonus is the most common type of bonus. Many companies will assign each employee a target bonus early in the year. At the end of the year, if an employee has reached their goals, they are rewarded with this annual bonus. The company or department must also reach their performance results in order for the bonuses to be paid out.

The amount of each bonus varies between departments and positions, and is typically determined by company leadership and HR.

4.  Holiday bonus

In addition to holiday pay, inspire your employees to get in the holiday spirit with a popular company practice—the holiday bonus. A holiday bonus is given around the winter holiday time to thank employees for a year’s work. They are a one-time payment that can be any size and are sometimes connected to a specific “win” for that employee such as reaching stretch goals, or exceeding key performance indicators (KPIs).

5.  Discretionary bonus

Discretionary bonuses, also called “spot bonuses,” are typically three-to-four figure bonuses given often as a spontaneous gift outside of compensation review cycles. This can be used to recognize outstanding performance or during difficult times. For instance, at the end of 2020, many companies offered discretionary bonuses to employees as a way to boost morale after a challenging year.

Discretionary bonuses can be granted in the form of cash, gift cards, or additional PTO.

6.  Referral bonus

Hiring can be stressful. A referral bonus is a helpful tool to avoid recruiter fees, and instead incentivize your employees to refer qualified talent for hard-to-fill positions. A referral bonus is given to an employee after someone they referred is successfully hired.

Referral bonuses can vary between hundreds to thousands of dollars. Some firms pay as much as 10-20K for senior positions. However, most companies determine the amount based on a number of factors:

  • Position: Some positions, such as engineering positions, are difficult to fill. A referral for this position may be easier to fill if other employees are incentivized with a referral bonus
  • Difficulty to hire: If a role is particularly difficult to fill, the referral bonus may be increased to help bring in better talent and referrals
  • Diversity: Some companies, such as Intel, will use a referral bonus to incentivize more diverse candidates, such as a woman, underrepresented minority, or a veteran

7.  Profit-sharing bonus

A profit-sharing bonus gives employees a little more “skin in the game.” With profit sharing, a company sets aside a predetermined amount of its pre-tax profits into a pool that is then distributed among eligible employees. This is given as a bonus on top of base salary in the form of stocks or a cash amount.

Because employees only benefit from a profit-sharing bonus if the company sees a profit, profit-sharing is often used to motivate employee performance and increase employee engagement. Profit sharing shows employees that when the company wins, everybody wins.

Some well-known companies that offer profit sharing are Delta Airlines, Southwest Airlines, Ford, and Wells Fargo.

The beauty of bonuses

Bonuses should be considered a value in the complex toolkit of employee management. A well-timed and appropriate bonus may be the difference between successfully hiring or losing an applicant to competition, or increasing loyalty with an employee who may be feeling dissatisfied. Whether you’re rewarding someone with a year-end bonus or ramping up the festive spirit with company-wide holiday bonuses, all bonuses are valuable assets in building a successful team.