Think about the last time a cashier gave you an unexpected discount or you stumbled on a cool bonus scene in a movie. Felt pretty awesome, didn’t it? People love bonuses—who can resist “free” or “extra” stuff? That thrill is why we get excited as shoppers and why bonuses catch our eye in job offers too.
But bonuses come with a lot of fine print. Knowing how they work and why companies offer them can help you pick between a job with weak pay and one that sets you up financially. Let’s break it down so you walk away feeling like an expert:
What is a bonus?
Why do companies give bonuses?
What kinds of bonuses exist, and how do they work?
What’s a typical bonus amount?
Are bonuses guaranteed?
Can you negotiate a bonus?
How can you make sure your bonus is fair?
How are bonuses taxed?
1. What is a bonus?
A bonus is extra pay that isn’t guaranteed—it’s usually given after hitting a certain milestone, says Adi Dehejia, a business coach and former CFO at The Muse.
Bonuses come in all shapes and sizes (we’ll cover them later), but most are tied to performance. Companies hand them out based on how much an employee (or team) helps hit goals—often revenue targets.
That said, many bonuses are discretionary, meaning they’re not tied to a strict quota or performance metric. Instead, your manager decides who gets one and how much.
As you can guess, this makes bonuses a tricky topic for both companies and employees.
2. Why do companies provide bonuses?
Often, it’s because the market demands it. If similar companies offer bonuses, a business might feel pressured to do the same to attract top talent. (Ever seen a sales job without a bonus structure?)
Bonuses also help companies hire high performers. When there’s a reward for results, you attract people who chase those rewards.
But the biggest reason? Bonuses motivate employees to push harder for the company’s success. “They align incentives—like, ‘You win if the company wins,’” Dehejia explains. And it works. People who know they can earn more by driving revenue—whether directly (like sales) or indirectly (like marketing)—will hustle to make it happen.
“It’s about sharing risk between the company and the employee,” Dehejia says. If the company underperforms, the employee’s pay takes a hit—unlike someone on a fixed salary who gets paid the same no matter what.
Some find this stressful. On the flip side, a flat salary means you might work extra hard sometimes without seeing extra pay. It’s a trade-off—one some people are happy to make.
Dehejia notes that bonuses should never be the only way to keep employees motivated. Pay is just one piece of the puzzle. “It doesn’t replace good management, praise, training, or growth opportunities,” he says. Companies should balance bonuses with other perks.
3. What types of bonuses are there, and how do they work?
Some bonuses come quarterly, others yearly. Some are one-time; others repeat. It depends on your role, level, contributions, leadership, and company (among other things).
Here are the most common types:
Annual Bonus
This is usually based on company performance. You might get a big bonus, a small one, or none—depending on how well your company (or department) did that year and your role in that success. It’s also called “profit sharing.”
Companies wait a full year to pay it because it keeps employees around longer—which is why few people quit right before bonus season. It also ties performance to a full 12 months, not just part of the year.
Spot Bonus
This rewards going above and beyond—usually for work outside your normal duties, Dehejia says. Maybe you helped on a special project, put in extra hours, or played a key role in unexpected success. Managers decide who gets one, and it’s usually a one-time thing (depending on budget and priorities).
Signing Bonus
A one-time bonus to convince you to accept a job. Companies might offer it if you’re walking away from a better deal, relocating, or if they can’t meet your salary ask. Sometimes it’s called a relocation bonus.
“But there’s usually a clause saying if you leave before a set time (often a year), you have to pay it back,” Dehejia says. (Though companies don’t always enforce this.) The hope is that the bonus keeps you around past that first year.
Retention Bonus
Like a signing bonus, but for keeping talent during big changes (mergers, layoffs, etc.). It’s paid after you stay through the agreed-upon period.
Referral Bonus
Encourages employees to refer great hires. You usually get it only after the new hire stays for a few months.
“The amount has to be tempting enough to actually refer someone,” Dehejia says—often $1K to several thousand. Some companies pay a flat rate; others pay more for hard-to-fill roles.
Holiday Bonus
Also called a “13th-month salary” or “Christmas bonus,” this rewards a year of hard work—and helps with holiday expenses. More common outside the U.S., it’s often 5-10% of your salary.
Commission
Like a bonus but tied to individual performance (sales, recruiting, real estate, etc.). Payment timing varies—monthly, quarterly, or yearly—depending on when the company considers it “earned” (e.g., when a client signs a contract).
Commission is usually a set percentage (e.g., 15-20% of a recruit’s first-year salary) or a formula (so everyone at the same level gets the same deal). It’s tied to a quota—hit 100% of your goal, get 100% of your commission.
4. What is a typical bonus?
It depends on the type. A 5-10% annual bonus is standard in many fields (like a 5-10% raise). Commission roles often pay higher percentages.
Industry, company size, location, and seniority matter too. A $5K relocation bonus might be great for a small town but laughable in a big city. Early-career workers might love a few thousand, while execs often see bonuses in the six or seven figures.
5. Are bonuses guaranteed?
Nope. Most are discretionary—companies aren’t forced to give them. There’s no federal law guaranteeing bonuses.
If your job is at-will, a company can fire you without paying bonuses. “Unless it’s in writing, there’s no guarantee. If it’s discretionary, they can do what they want,” says employment lawyer Brian Heller.
Commission is sometimes treated as mandatory pay. For example, New York labor law says “earned” commission is wages—even if you’re fired. But companies define “earned,” so they have wiggle room.
“Many bonuses require you to still be employed when paid,” Heller says. Quit or get fired before payout? You might lose it, even if you earned it.
Companies can also distribute bonuses unevenly. “Favoritism isn’t illegal—unless it’s discriminatory,” Heller adds.
6. Can bonuses be negotiated?
If you deserve more, try negotiating—just like salary.
Career strategist Chelsea Williams says to negotiate before signing anything. “Aim higher than what you actually want,” she advises.
Salary coach Theresa Merrill helped a client who’d have a gap between jobs. They asked for a signing bonus to cover it. “Always negotiate salary first. If they won’t budge, go for the bonus. Companies prefer one-time bonuses over raises.”
She also says don’t just accept the first offer. “If they offer 8K,askfor8K,askfor10K. Most people are so excited to get a bonus, they forget to push.”
When to negotiate a signing bonus:
- You have multiple offers (or late-stage interviews).
- The company reached out to you first.
- You’re leaving a stable job for a startup.
- You’re relocating.
- The salary is lower than your last job.
Do your homework. “Strong performance—yours and the company’s—is key for negotiation,” Williams says. Know market rates (salary calculators help) and have proof of your wins.
Be confident. Try lines like:
- “I’ll sign today if you add a $X signing bonus.”
- “Another offer pays X% more. How can you close the gap?”
No guarantees, but being informed and assertive helps.
7. How can I ensure I’ll receive a fair bonus?
Always read the fine print and ask questions—especially if bonuses are a big part of your pay.
Ask in interviews:
- “How does the bonus structure work here?”
- “What’s typical for this role?”
They might not give exact numbers, but even a range helps.
Wait to discuss money until final rounds. And don’t just trust the interviewer—ask your network what similar roles pay.
If it sounds too good to be true, it probably is. A huge bonus might mean:
- An impossible quota.
- Heavy dependence on company performance.
- A low base salary hiding behind the bonus.
Weigh the long-term trade-offs. A signing bonus is nice upfront, but a higher salary might pay more over time. A low base + high bonus can hurt future negotiations.
Get it in writing. Contracts or emails count. “Verbal promises usually aren’t enforceable,” Heller says.
Plan for the worst. What if you don’t get the bonus? Can you still pay bills?
Be ready to hustle. If your pay depends on performance, know what you’re signing up for.
8. How are bonuses taxed?
The IRS treats bonuses as “supplemental wages,” so they’re often taxed higher than regular pay. Two methods:
- Flat 22% rate (common—it’s simple and avoids huge cuts).
- Aggregate method (combines your bonus with your last paycheck, calculates tax on the total, and withholds the difference from the bonus).
Executives earning over $1M in bonuses get taxed at 37%.
Final Thoughts
Money matters—understanding bonuses is crucial. But don’t forget about culture, management, and growth opportunities. The best job isn’t always the one with the biggest bonus.
