What is a Performance Bonus?

Performance bonuses are intended to be motivational tools that encourage employees to keep goals in mind and take action in their everyday work to help the company achieve those goals.

It is important to note, however, that performance bonuses are generally taxed as income, which means a $10,000 bonus can easily become a $6,000 bonus if the recipient's federal and state tax rates total 40%.

How Does a Performance Bonus Work?

For example, let's say Company XYZ's goal this year was to earn $0.05 per share. On December 31, it closes the books on the year. Two weeks later, after the accounting has been completed, the company declares that its earnings for the year were $0.06.

Because the company beat its goals, it decides to reward certain employees who played particularly important roles in beating the goal. These employees receive a check for, say, $10,000 as a thank you. We call this a performance bonus.

Employees typically receive performance bonuses at the option of the company. Sometimes there are written goal plans whereby employees know in advance that if their personal performance or particular aspects of the company's performance exceed certain goals by a certain amount, a year-end bonus will occur for a certain amount. In other cases, employers give bonsues on a more arbitrary, personal basis. In yet other cases, performance bonuses are part of employment contracts for key employees (such as CEOs) and have predetermined parameters or amounts.

Why Does a Performance Bonus Matter?

A performance bonus is extra money given to an employee as a reward for helping a company achieve financial or other goals.