Bonus Definition

Learn more about what a bonus is in business.

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Bonus definition

Most small business owners understand the basic concept of a bonus. It’s a reward an employee receives that’s above and beyond what they normally earn. But the term has many applications throughout the world of business. Read on to get the bonus business-specific definition and some common examples.

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What Is a Bonus?

According to the Merriam-Webster dictionary, the bonus definition is “[s]omething in addition to what is expected or strictly due.” Bonuses are common throughout the commercial world. In fact, almost all commercial legal entity types, including limited liability companies and corporations, use bonuses.  

Bonus Examples

Here are some of the most prominent bonus examples. 

1) Signing Bonus

Are you looking for a way to attract outstanding applicants? A signing bonus could be just the tool for the job. A signing bonus is a one-time payment that companies pay new employees when they join. Signing bonuses both attract good employees and help start the employer-employee relationship off on the right foot. 

2) Referral Bonus

Businesses can use referral bonuses for customers, partners, and employees alike. Whatever the exact context, referral bonuses reward a person who refers a customer or potential employee to the company. 

3) Holiday Bonus 

Everyone loves a little holiday cheer. A holiday bonus helps employees celebrate the festivities with their family and friends by giving them a little extra cash. They also help employees pay for all those expensive holiday gifts!

4) Retention Bonus 

Unlike the employees of 40 or 50 years ago, employees today are highly mobile. And because producing a competent, capable employee typically requires an extensive training investment, losing experienced employees can be quite a loss for a company. Businesses can help reduce employee turnover by offering a retention bonus. These bonuses reward employees for remaining with a company over an extended time period.  

5) Commission

Commission is a special kind of bonus companies often use for salespeople. Commissions reward a salesperson for the amount of sales they make over a period of time. Unlike performance bonuses, which are given after the fact, commission plans are defined in a salesperson’s initial employment agreement. Giving a salesperson the right kind of commission can allow them to produce incredible results for the company. 

Bonus Advantages and Disadvantages

Bonuses produce more than a few advantages for the companies that use them. However, business owners should be careful not to use them too much or too little. And certain kinds of bonuses can have unique disadvantages. 

Bonus Benefits

Bonuses benefit companies by incentivizing their workforce or customer base. By improving morale, companies can reduce turnover. When customers receive bonuses, the company can improve its reputation, bolster its brand strength, and increase revenues. 

Bonus Disadvantages

Bonuses that are too large or too frequent can cost the company more than they’re worth. For commissions, in particular, companies must carefully set the parameters of the commission plan. A commission plan without a compensation ceiling can lead employees to receive far more than they should. This, in turn, can harm the company’s bottom line and financial health.   

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Summary

Bonuses are rewards businesses give to employees or customers to improve their performance or otherwise incentivize them. 

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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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