For many employees, a Christmas bonus is a happy conclusion to a long year of hard work.
A year-end bonus (sometimes called a Christmas bonus) is a reward paid to an employee at the end of the year. Many year-end bonuses are tied to performance metrics, and the amount can vary depending on whether certain milestones are met. Year-end bonuses are usually made up of lump-sum payments used to reward the individual for hard work and dedication.
How Year-End Bonuses Are Determined
According to Investopedia, a year-end bonus can be offered by any size company, typically when the overall sales and profit goals for the year have been met or exceeded. The company may aim to offer year-end bonuses on a regular basis, or only offer them after an exceptional performance. These bonuses may be structured based on the employee’s salary, how well they met personal goals such as achieving sales targets, or other measures. In many examples, the year-end bonus is a taxable increase in salary, which means the actual take-home pay may not be as large as anticipated. Furthermore, the size of the bonus could elevate the employee’s salary to another tax bracket, which may force them to pay an even higher tax rate against their entire compensation for the year. That can lead to the employee owing money when they file their income taxes due to the sudden bump in salary at the end of the year.
The size of the bonus might also stem from the pay grade of the employee, with larger percentage boosts to salary offered to more senior staff and executives.
Some companies might offer year-end bonuses as a contractual part of an employee’s salary as a way to encourage superior work performance on a consistent basis. Contractual year-end bonuses are more often offered to executive management when they are hired or promoted, and might not be tied to the company’s performance at all. In this capacity, the bonus can serve as a hiring and retention tool to keep key personnel on board with a company when job openings at rival companies offer higher base salaries.
If a company misses its targets or otherwise underperforms, however, it is possible that a company will withhold year-end bonuses for some, if not all, individuals on the payroll.
Year-end bonuses that are not derived from cash may also be offered. This can include supplemental vacation days or gifts.
Types Of Bonuses
Year-end bonuses can take many forms; Profit-sharing, one type of bonus some companies use is a profit-sharing plan. Employers often implement these plans because they want to give their employees a sense of ownership in the company. With profit-sharing, the company distributes a certain percentage of the company’s quarterly or annual profits to employees, usually based on each employee’s annual salary. Some companies provide the shares of profit as cash payouts, while others contribute the bonus payout to retirement plan on behalf of their employees.
Noncash bonus, this is any award or prize that is not of monetary value. An example might be an extra day of paid time off or a coveted parking spot in the employee lot. Usually, noncash bonuses are tied to programs like employee of the month, and companies regularly award them to employees for meeting certain criteria.
Sign-on bonus, a payout agreed upon when starting a new job. Companies often use this nondiscretionary bonus when trying to recruit highly qualified staff, to fill a role that has a high turnover rate or when a new employee is leaving a considerable amount of money behind at their past job, either through a salary cut or loss of guaranteed bonuses to accept a new position. Some companies pay signing bonuses in one lump sum, while others might spread the payments out over a year as a way to retain the employee in the role for a certain amount of time.
Milestone bonus, also known as task bonuses or mission bonuses are directly tied to work performance. Companies give milestone bonuses for reaching certain metrics or goals. The company decides the milestone in advance so a team or individual has a goal to work toward to earn the bonus payment.
Annual bonus, companies usually give annual bonuses when the organisation has a successful year. For some companies, annual bonuses are a guarantee, though the amount may differ from year to year depending on the company’s profits. Other companies only distribute annual bonuses after a particularly successful year.
Retention bonus, some companies provide retention bonuses to current employees to entice them to stay with the organization. Often, the company presents these in advance so employees know they are entitled to a certain amount of money if they stay with the company for a definite amount of time. Companies might also offer retention bonuses during a merger, acquisition or other major organisational change to keep staff numbers up through the transition.
Referral bonus, this payment is given to employees who recruit talent to join the organization. Referral programs can vary from company to company, with some giving a flat payout rate regardless of the position, while others pay their employees more for finding candidates for hard-to-fill or executive-level roles.
