Greg de la Cruz works at NCR Corp's R&D center in the Philippines. He is interested in economic history and current world financial affairs.
What Is a Bonus?
A bonus is an amount granted and paid to a worker for their industry and loyalty, which contributed to the success of the employer’s business and made possible the realization of profits; it is granted by an enlightened employer to spur the employee to greater efforts for the success of the business and realization of bigger profits (Cesario Alvero Zucena, Jr., The Labor Code with Comments and Cases).
Great as Azucena was—legendary, especially in terms of his contributions to Filipino labor law—he could not have predicted how companies around the world would put their own spin on the concept of a bonus.
Legally speaking, a bonus, Azucena adds, “is not a demandable and enforceable obligation.” And whether or not it forms part of a worker’s salary or wages depends upon the circumstances and conditions for its payment.
Andrew Bloomenthal of Investopedia provides a more modern definition of a bonus, which is “a financial compensation that is above and beyond the normal payment expectations of its recipient.” He adds: “While bonuses are traditionally given to exceptional workers, employers sometimes dole out bonuses company-wide to stave off jealousy among staffers.”
Why do I think his definition is more modern? Because his definition suggests that bonuses are no longer to be expected these days (especially by ordinary workers), and in the event they are given out, it’s usually to appease workers.
In order to make everyone happy, companies with a large workforce resort to non-monetary tokens and call these ‘bonuses’—survival kits, fruit baskets, box lunches, thank-you notes, plastic ornaments, tumblers, ‘work-from-home’ passes, turkey discounts—the list goes on.
These are quite thoughtful but also quite insulting.
I’ve scoured the internet to know as much as I can about bonuses. This article is my definitive guide to the many different types of bonuses in the workplace.
Why Companies Prefer Giving Bonuses Instead of Pay Raises
But first—a very important note. Let us not lose sight of the fact that in many countries, wages have stagnated. Have companies simply adopted the view that giving bonuses (a voluntary act) is better than giving pay raises (which increases their fixed cost over time)?
James McWhinney of Investopedia made an obvious yet insightful point in 2020: “Raises are a permanent increase in payroll expenses; bonuses are a variable cost and therefore give business owners greater financial flexibility when business is down.”
The argument for doing bonuses over pay raises seems to hinge on the preference for businesses to have more freedom within their balance sheet, especially with the market constantly churning out surprises. McWhinney adds that bonuses “can be more financially feasible for business owners to manage since they’re a variable cost, with payment tied to sales or production volumes.”
In addition to the advantage of gaining more financial flexibility, bonuses are easy to leverage as motivation for employees to work harder or perform better. Raises can do that, too, but employers would like to be able to “turn off the tap” whenever they want—if there’s a high-impact project in the works, they need to be able to push a button that ensures their workers take it on with full attention, and they simply can’t give out raises every time that happens.
22 Types of Bonuses in Alphabetical Order
Because employers have chosen to make things more complicated and would rather have employees depend on them to hand out non-mandatory rewards, all sorts of bonuses have appeared in the workplace.
To save you time and not create unnecessary confusion, I’ve done my best to consolidate bonuses with the same function under one name. Here are 22 different types of bonuses, arranged in alphabetical order.
1. Anniversary Bonus
Sometimes referred to as the annual bonus (not to be confused with the year-end bonus), the anniversary bonus is an uncommon bonus given by prestigious organizations celebrating the anniversary of their founding.
This bonus is actually more common than some realize in the Philippines, where national government agencies have their respective type of anniversary bonuses. The anniversary bonus could easily just be some kind of mid-year bonus, except, of course, for those companies or agencies that have their anniversaries within either the first or last quarter of the year.
Not to be confused with the milestone bonus, which is sometimes given in the form of one’s nth anniversary—Tim Cook, for example, was given a 10th-anniversary bonus amounting to $750 million—the anniversary bonus is usually given to all employees, and often in the same amount.
2. Annual Wage Supplement
In some countries, the annual wage supplement (AWS) is made mandatory, such as in the Philippines, where it is called “13th-month pay.” In this case, it ceases to become a bonus since it becomes demandable and enforceable upon the employer.
In Singapore, it is completely voluntary and is “a single annual payment on top of an employee’s total annual wage” (Ministry of Manpower). It is not compulsory, and its payment depends on what’s stipulated on one’s employment contract or collective agreement.
Singapore’s Ministry of Manpower adds that employers “are encouraged to give their employees AWS to reward them for contributing to the company’s performance.” This is not surprising at all when you think of Singapore’s already-high wages.
3. Bonus Issue
Speaking entirely on stock terms, a bonus issue is an offer of free additional shares to existing shareholders (Will Kenton, Investopedia). This doesn’t usually apply to employees, as this is given out to shareholders of the company.
These are given to shareholders when companies are short of cash and shareholders expect a regular income. But a bonus issue can also be used as a reward to employees when the company is too short in cash and it resorts to some form of employee stock ownership program.
For some employers, a sales commission is the salary itself, and in fact, in the Labor Code of the Philippines, an employee’s wage may include the commission, in its wide definition, “a remuneration of earnings, however designated, capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis . . . ”
But as for some more generous and practical employers, the employee is paid a base salary, and if he hits a target or quota or beyond it, he earns extra commission—in which case the commission would be more akin to a performance incentive.
5. Discretionary Bonus
Being one of the most common forms of bonuses in the modern workplace, a discretionary bonus is allocated and calculated based on a manager’s decision alone. According to Primeum, it has many names, such as managerial bonus, quality bonus, bonus at the manager’s discretion, pirate bonus, or even “office budget.”
That latter name for discretionary bonus is probably the least sexy-sounding. It’s sometimes called a pirate bonus because the manager has a budget; he first takes his share and then allocates the remainder to his teams.
6. Failure Bonus
Perhaps one of the most creative types of bonuses (and one that the vast majority of employers will likely frown upon), the failure bonus is something that Intuit gives out to “The Best Failure” each year, and it even holds “failure parties.” According to co-founder Scott Cook, “every failure teaches something important that can be the seed for the next great idea.”
7. Gain Sharing
To be differentiated from profit sharing, gain sharing is an incentive system in which, as the employees’ performance improves, they share financially in the “gain.” The goal of this system is to improve performance and reduce waste, and even sometimes called “savings sharing,” which means that the company shares with employees the savings from improved performance.
This is more common than people realize, especially with national government agencies. The usual setup is that the national government allocates an overall budget to a sector, specifically apportioned to the government agencies in that sector, and then the agency works around a year’s expenses using that budget.
In many agencies, they’re allowed to use whatever savings they have and convert those into bonuses for government employees. I remember a friend who told me that their director would even resort to creating dark spots in the office—areas where not many people pass by or use—physically removing lights from the ceiling and squeezing as many savings as he can from utilities. These cost savings can then be reallocated as part of the year-end bonus.
8. Group Bonus
Oftentimes, it’s easier to motivate an entire group as opposed to leaving it to individual employees (some are likely to be less motivated than others), and a group bonus scheme helps organizations get the most out of individual teams. A group bonus is an incentive wage divided among a number of workers cooperating on a task in proportion to the time worked and rank held by each (Merriam-Webster).
The group bonus can also be used by organizations as a way to manufacture healthy competition within the workplace—creating scarcity by only giving it out to the top-performing teams or those who hit a specific target or complete a specific task.
9. Loyalty Bonus
Similar to a retention bonus, a loyalty bonus is a reward that an employee is given for being loyal (Cambridge Dictionary). One example is giving money upfront to an employee on the condition that he stays x number of years, wherein the employer can forfeit the bonus should the employee leave earlier. This should be distinguished from the loyalty bonus in non-workplace applications, such as when credit card customers are gifted loyalty bonuses by the issuer.
Instead of giving a one-time loyalty bonus, some companies do a loyalty program where you are given money or something in kind every time you hit a specific number of years of service—for example, $500 for your 5th year, $10,000 for your 10th year, and so on.
10. Milestone Bonus
The milestone bonus has usually been found in the tech industry and other technical fields. It’s sometimes called a “project bonus,” which gives the impression that it focuses on critical deadlines. It can be paid based on the success of the project and the overall quality of the result.
The organization offers the employee an opportunity to earn extra money, sometimes a percentage of his salary, if he achieves specific outcomes. Based on the description we have here, you could argue that the milestone bonus is easily just one of many names of the performance bonus.
11. Noncash Bonus
Depending on how and how much an organization offers, they can either execute a noncash bonus well or horribly. Some companies use petty cash just to hand every employee a mini first aid kit or a box of apples. But then there are also those who put a lot more effort into it (sometimes way more effort than just dropping the money in an employee’s payroll account or handing out a check).
The more effortful way of doing this would be contracting out with a vendor who does personalized jackets with the employee’s name embroidered on them, or by embossing the employee’s name in a gold watch, or through other similar means.
This may be plain as day, but I suppose the value and reception of a noncash bonus have a lot to do with the actual monetary value that the organization allocates for it. And also, some points for effort.
12. Performance Bonus
A performance bonus, according to Julia Kagan of Investopedia, “is a form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets.” It sounds a lot like the milestone bonus which we covered earlier.
Performance bonuses simply cover a class of bonuses that reward an employee extra money based on performance. Unlike milestone bonuses which are not usually standardized or institutionalized, performance bonuses tend to be instituted regularly, such as annually, biannually, or monthly.
13. Profit Sharing
Profit-sharing is a system where employees are paid a share of the net profits of the company in accordance with a written formula defined in advance (Britannica).
They’re said to have originated in France, where they were used as early as the 1800s to boost productivity and reduce animosity between workers and owners. Another early pioneer of the profit-sharing system was Theodore Cooke Taylor, who implemented the practice in his wooden mills.
The cool thing about profit sharing, aside from easing tensions between workers and management, is that it motivates both employer and employee to perform well. And, in a down year, for example, when the costs are too high or in a recession, the employer wouldn’t be pressured to hand out bonuses since the system established was one in which employees have a reasonable share of the bottom line.
The profit-sharing scheme is common in many types of mills and processing plants, where the workers would be incentivized to deliver more output since whatever excess could help increase profits.
14. Ranking Bonus
Probably not the healthiest type of bonus, a ranking bonus system consists of classifying employees according to their performance and paying them a ranking bonus based on their rank (Primeum).
Based on this definition, one could call it a “tiered bonus.” If a company has a cap on bonuses or commissions, then it could easily apportion the budget among different classes of employees—top performers, mid, low performers, etc.
The convenience of the ranking bonus is obvious, but it also produces the unintended consequence of classicism in the workplace. It could create some bias if qualitative assessments are factored in, and predetermined perceptions of an employee would either work to his favor or disadvantage.
Another negative consequence would be that instead of competing to get the highest results, some employees might resort to sabotage to prevent others from overtaking their position.
15. Referral Bonus
The referral bonus has become very commonplace in the modern era and essentially represents cash from a company’s hiring budget. It is defined as an award given to an employee who helps recruit new talent by referring someone for an advertised, hard-to-fill vacancy (Office of Personnel Management).
Judging from where I got the definition, apparently, referral bonuses are also applied in the public sector. This bonus exists in almost every workplace, especially those with hiring cycles or in the service sector.
Staffing is extremely important in the services industry, and so if companies can save time and money in looking for people to fill vacancies, they’re happy to pay a referral bonus for the person who can help them look for talent.
16. Religious/Cultural Bonus
Perhaps this is where bonuses such as the “Diwali bonus” or the “Ramadan bonus” fall. In some countries, such bonuses, which either celebrate the religious or cultural event or are just incidental due to the timing, can also be either mandatory or voluntary.
The Diwali bonus in India is mandatory for establishments with 20 or more employees or any factory with 10 or more. If the company is young or has not been around for at least five years, the bonus should only be paid if the company is profitable. In India, it’s more of a statutory benefit than it is a bonus, so maybe it doesn’t really fall into the category of a bonus.
17. Retention Bonus
Of the many bonuses thus far described, a retention bonus is one that probably makes the most sense, being a very strategic incentive. According to Julia Kagan of Investopedia, a retention bonus is “a targeted payment or reward outside of an employee’s regular salary that is offered as an incentive to keep a key employee on the job during a particularly crucial business cycle, such as a merger or acquisition, or during a crucial production period.”
This is probably where golden handshakes and golden parachutes fall under—incentives given to CEOs to “stay the course” while something that might jeopardize their job but at the same time benefit shareholders is about to happen.
You could argue that a retention bonus also applies when a company incentivizes employees to stay during the holiday period, during a high-volume production season—to pay them more money in exchange for not using that time to take paid leave. (Well, at least they don’t threaten to fire people if they don’t show up and go the other direction instead.)
18. Signing Bonus
A signing bonus could be considered a variant of the referral bonus, except that the bonus would go entirely to the new hire. Also called a sign-on bonus, it refers to a financial award as an incentive for an employee to join the company.
The signing bonus is used a lot in pop culture, TV, and film to portray employers luring sought-after talent to join their company. This bonus is usually offered to highly qualified job candidates who may be considering job offers from other companies.
19. Spot Bonus
A spot bonus is paid “on the spot” for a specific behavior, action, or result and tends to be a smaller amount of money than the actual incentive reward (Harvard Business Review).
The spot bonus gained popularity during the COVID-19 pandemic, where, because of the economic slowdown, many companies could not afford large annual bonuses. But what happens when a company needs its employees to perform well, despite the lack of monetary incentives? Or when there are proactive employees that exceed expectations despite all the challenges?
The spot bonus is a way to show recognition to employees, however little the amount may be. Indeed.com cites one benefit as “showing appreciation and recognition for the extra efforts your employees put into their jobs, which can improve employee retention.” Spot bonuses made a lot of sense during the height of the pandemic when money wasn’t hot, but employers wanted to ensure there were no staffing issues.
20. Stay-Put Bonus
The stay-put bonus is a term I invented (or at least claim to inventing) when I saw all those articles about manufacturing plants in China giving workers extra money to “stay put” during the holiday season when demand soared. You can easily call this a short-term retention bonus or a seasonal bonus, but I have to say I’m not a very big fan of it.
The reason the stay-put bonus isn’t so high on my radar is the idea that it essentially pays for a person’s time or puts a premium on it. The stay-put bonus could easily just be glorified overtime pay because the employer is paying the employee for time that he shouldn’t be working or expected not to work (to have a life).
21. Travel Bonus
This is one of the coolest non-cash bonuses of all, so I had to assign it as a separate type of bonus. In 2021, the CEO of Spanx, an underwear company, shocked and nearly blew off employees’ pants (I apologize for the pun) when it rewarded every employee with two first-class plane tickets to anywhere in the world. That, plus $10,000 in cash to spend.
Travel incentives are common for some big companies, especially those in the tourism sector. Maria Teresa Hart did us a favor in 2017 and put together a list of nine companies that offered travel incentives to their employees:
- G Adventures
- Walt Disney
- AFAR Media
- Delta Air Lines
22. Year-End Bonus
Last and certainly not least—the year-end bonus. Also called "holiday bonus" or "Christmas bonus," it's the economy's favorite type of bonus since employers are known to give it out at around the same time every year, which is around the last two months. Such an incentive given to most of the labor force means consumer spending goes way up in the holiday season.
The year-end bonus has become something to expect for many employees that it's borderline institutionalized and factored into a worker's salary. In the Philippines, 13th-month pay is mandatory, which means it doesn't fall under the classification of a year-end bonus—however, it is normally paid out in November or December, causing confusion among those who are not very familiar with Philippine labor law—and causing some employers to pretend to withhold the benefit as if it was contingent on an employee's performance.
The Case for No Bonuses
That’s a wrap. I hope you found this article a useful collection of different names of bonuses, and I myself learned some new things while researching for this piece. Before I end this article, let me quickly discuss the case for no bonuses—which, I’m pretty sure, paints angry eyebrows on any reader.
The very idea of working towards a bonus can have detrimental consequences. There is a stress factor that comes into play, especially when striving to achieve a performance-based incentive. Some people come to depend on bonuses, executing financially unwise decisions and “waiting” for their bonus to solve their problem. They go into debt and encounter difficult times with their money, relying on the one-time fix-all solution that may or may not come.
And for others, especially those who are fed up with their work environment or with their employer in general, they unintendedly accumulate a “debt of gratitude” to their employer for giving them extra money when the wiser decision would have been to leave their miserable situation. In this case, the bonus would be used as some form of distraction or a retention “tactic” (I refuse to call it a retention bonus since it doesn’t help the employee at all if he chooses to stay).
Having gone through these 22 different types of bonuses, one thing is clear—bonuses are great when they’re intended to show appreciation, with nothing expected in return.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Greg de la Cruz