A bonus is compensation paid on top of regular wages or salary, often to reward performance, retention, profit targets, or completion of a specific task.
Why firms use bonuses
Bonuses are part of incentive design. In principal-agent terms, a firm wants worker effort, quality, or retention, but it cannot observe everything perfectly. Variable pay can help align worker behavior with the firm’s objective.
Common bonus structures include:
- individual performance bonuses,
- team bonuses,
- profit-sharing,
- signing and retention bonuses.
Economic trade-offs
Bonuses can improve effort when performance is measurable, but they can also create problems:
- workers may focus only on rewarded tasks,
- risk is shifted onto employees,
- poorly designed targets can encourage gaming,
- strong bonus culture can widen pay dispersion inside firms.
So the economic question is not whether bonuses are good or bad in the abstract. It is whether the metric being rewarded matches the behavior the firm actually wants.
Labor-market context
Bonuses are especially common where output can be measured clearly or where firms compete hard for scarce labor. In other settings, fixed wages may work better if performance is hard to verify or teamwork is central.