Explainer: Bonus Structures

In the next edition of my explainer series, we discuss the common types of bonus structures you may come across at work: annual bonuses, quarterly bonuses, and sign-on/one-time bonuses. We’ll go through key terms, questions to ask your employer, and areas that are negotiable.

Annual Bonus Structure

An annual bonus structure is the most typical structure we see in the corporate world. There are exceptions to this in certain industries, like sales (commission structures) or professional services (profit share), but in general they are an important structure to understand and negotiate.

• An annual bonus covers a one-year performance period that is typically aligned with an organization’s fiscal year. For example, if your organization’s fiscal year is January 1, 2025 to December 31, 2025, the bonus performance period will usually be the same.
• In most organizations, if you resign part way through the performance period (for example, September 17, 2025), you will receive $0 of your bonus payout. This is deliberate, as annual bonuses are often used as a tool to retain you over the full year.
• In some organizations, the bonus is not actually paid out until weeks or months after the performance period – and if you leave before the payout date, you will still receive $0.

Structure: Annual bonuses are most commonly structured in two ways:

1. As a percentage of salary. For example, if your salary is $100,000, your annual bonus target may be 20%, or $20,000 ($100,000 salary x 20% target = $20,000 annual bonus target).
2. As a pre-set number. For example, you may earn $100,000 and your annual bonus target is pre-set at $35,000.

In both cases, an annual bonus will often be the same across employee level. For example, all managers in the company may receive a 20% target annual bonus. “Target” means you would receive that amount if you hit the specific performance metrics set out for you (more on that below).

Payout: The ultimate payout of an annual bonus is based on the performance demonstrated over the performance period. Typically, this performance is based on one or a combination of the following:

• Individual performance: how have you performed against key individual metrics over that year. Examples of metrics include achievement against specific deliverables, number of clients worked with, leadership skills, sales goals.
• Organization performance: how has the organization performed against key organization metrics over that year. Examples of metrics include revenue, profitability, share price.
• Team performance: how has your team performed against key team metrics over that year. Examples of metrics include number of projects, completion of team milestones, team expense management.

As you get more senior in your career, typically more of your bonus structure will be made up of organization performance because in theory, you have more influence over it.

Questions To Ask on your Annual Bonus:

• If the organization uses multiple bonus metrics, ask about the weighting of each metric to better understand how your performance is evaluated. For example, it is common for an annual bonus to be made up of 50% organization performance and 50% individual performance.
• Ask how your bonus metrics are measured. For example, what is the annual revenue goal? How is my individual performance rating assessed? What is the minimum and maximum payouts I can receive under this structure? Can I see the payout curve?
• If you’re joining a new employer, ask what their historical bonus payouts are. One organization to another can have the same target bonus amount, but actual payouts received can be materially different based on the nuances of their program.

Negotiating: As you get more senior in your career, more of your compensation will likely be made up of performance-based elements like annual bonuses. These can be easier to negotiate for because you only receive a payout if you, the team, or the organization does well, meaning it’s lower risk for the organization. At the same time, annual bonuses can lead to significant payouts. If you’re negotiating a full compensation package, don't hesitate to push hard on the annual bonus. The Thoughtful Co. can help with this, book in a session with us here.

Quarterly Bonus Structure

A quarterly bonus structure operates very similarly to an annual structure, but allows for performance assessment and payouts on a quarterly basis instead of an annual basis. In many cases, this is beneficial because you don’t have to stay at an organization for a full year to see any payouts. It lowers the risk for you if you’re considering leaving in the near-term but still want to be compensated for the performance you’ve achieved.

Items to Be Aware Of: Because of this payout advantage, sometimes quarterly bonuses can be lower dollar amounts than annual structures. They often are intended to incentivize quick actions in the short-term, so can be used for sales roles or competitive talent sectors like technology. While at face value they might seem better because of their frequent payouts, make sure you’re assessing these rigorously as well – what are the metrics used to assess performance? How have they paid out in the past? Is the bonus capped at a certain amount? Is there a minimum received regardless of company performance? What is the total amount in a year you can expect to achieve?

Sign-On and One-Time Bonuses

A bonus structure our clients sometimes forget about is a sign-on or one-time bonus. Sign-on bonuses are given to new hires, whereas one-time bonuses are given to current employees for a specific reason (for example, completion of a high intensity project, or retention during a turbulent time). These bonuses can have varied payout periods, from 6 months to 5+ years.

Negotiating: If you’re moving employers, consider negotiating for a sign-on bonus. They can be much easier to ask for given they are a one-time expense to the organization. Additionally, if you’re walking away from a bonus or equity vest at your current employer, ensure you’re getting that covered at your next. With one-time bonuses, get creative here – we support a lot of our clients in structuring one-time bonuses to achieve their specific goals or be rewarded for specific projects.

While these are three common bonus structures, there are many different types of bonuses you might come across. If you have any questions on bonuses and how to negotiate them, don’t hesitate to reach out to us at [email protected] or book an introductory call here.

And also check out our other explainer articles on stock options, restricted stock units and performance stock units to gain a better understanding on your equity compensation.