Bonus pay is compensation over and above the amount of pay specified as a base salary or hourly rate of pay. The base amount of compensation is specified in the employee offer letter, in the employee personnel file, or in a contract. Bonus pay can be distributed randomly as the company can afford to pay a bonus, or the amount of the bonus pay can be specified by contract.
Bonus pay that is specified by contract is used most frequently to reward executives. While employees might wish that executive bonus payments were tied to performance results, this is not always the case. A structure of bonus payments is frequently found in sales organizations to reward sales performance at specified levels over and above commission. Some sales organizations reward employees with bonus pay without commission.
Bonus pay is used by many organizations as a thank you to employees or a team that achieves significant goals. Bonus pay is also used to improve employee morale, motivation, and productivity. As long as bonus pay is discretionary by the employer, it is not considered to be a contract. If the employer promises a bonus, however, the employer may be legally liable to pay the bonus.
Finally, if bonus pay is extended to a non-exempt employee, under the Fair Labor Standards Act (FLSA), the employer must generally count the bonus pay in the employeesâ€™ hourly rate when calculating overtime pay.
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