Bonus: Overview, definition and example
What is a bonus?
A bonus is a financial reward given to an employee or individual in addition to their regular compensation, often based on performance, achieving specific goals, or as part of an incentive program. Bonuses can take various forms, such as cash payments, stock options, or non-monetary rewards, and are typically offered as a way to motivate, reward, or recognize employees or contractors for their contributions to the organization or meeting certain milestones.
Bonuses are often discretionary, meaning that the employer or organization has the discretion to decide when and how much to pay, but they can also be contractual if specified in an employment or incentive agreement.
Why is a bonus important?
Bonuses are important because they serve as a tool for recognizing and rewarding exceptional performance or achieving certain targets. They help incentivize employees, motivate productivity, and align individual efforts with the overall goals of the company. For businesses, offering bonuses can also improve employee retention, satisfaction, and morale.
In contracts, specifying the terms under which bonuses are awarded helps manage expectations, ensures fairness, and provides clarity regarding eligibility criteria, calculation, and payment timelines.
Understanding a bonus through an example
A sales manager at a company has a compensation package that includes a base salary and a performance-based bonus. The contract specifies that if the sales manager meets a specific sales target, they will receive a bonus equivalent to 10% of the sales revenue above the target. If the sales manager exceeds their sales target by $100,000, they will earn an additional $10,000 as a bonus.
An example of a bonus clause
Here’s how a bonus clause might appear in an employment contract:
“The Employee shall be eligible for an annual performance-based bonus, which will be calculated as 10% of the total sales revenue exceeding the set target of $1,000,000. The bonus will be paid within 30 days of the end of the fiscal year, provided that the performance criteria set forth in this Agreement are met.”
Conclusion
A bonus is a valuable tool for incentivizing and rewarding performance within a company or organization. Whether performance-based, goal-oriented, or part of a broader compensation package, bonuses help motivate employees and reinforce behaviors that contribute to the company’s success. A well-defined bonus clause in contracts ensures that both parties understand the eligibility, criteria, and timing for bonus payments, which helps prevent misunderstandings and sets clear expectations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.