DEFINITION of 'Cash Bonus'

A cash bonus is a lump sum of money awarded to an employee, either occasionally or periodically, for good performance. A cash bonus for better-than-expected performance may be awarded to an individual, division or the entire organization, depending on the level at which performance targets were exceeded.

While some companies pay out quarterly bonuses, the majority give cash bonuses to their employees once a year. This annual bonus is generally paid at the end of the year in order to help employees with the higher levels of household expenses during the holiday season. Cash bonuses can vary greatly in size, from a few hundred dollars to millions for top performers in highly-paid professions like investment banking and trading.

BREAKING DOWN 'Cash Bonus'

As the level of cash bonuses is primarily determined by the profitability of an organization, it can fluctuate significantly from one year to the next, depending on how well the economy is doing. Cash bonuses can reach record levels during economic booms but may dwindle or be eliminated altogether during recessionary periods.

How Cash Bonuses Influence the Economy

Cash bonuses can have a significant short-term impact on the local economy in areas where the average bonus level is high. For example, in financial centers like New York and London, high cash bonuses that are paid when the economy is booming can lead to a spike in demand for luxury items such as sports cars.

Research regarding the impact of cash bonuses on employee productivity has produced mixed results. Some researchers suggest that cash bonuses do little to improve employee satisfaction and performance. However, a 2013 report by researchers at Harvard indicated that workers who were awarded cash bonuses were more productive than those who received a raise, even though they were earning the same amount. The researchers concluded that employees who get raises simply assume that the higher salary is the new going rate for their services. But workers who receive cash bonuses are more likely to view them as discretionary rather than mandatory payments, and so they tend to reciprocate the gesture by working harder.

A cash bonus, like any form of compensation, is subject to taxation. The bonus may be tender with the related taxes already deducted. Even if taxes are not collected at that time, the increased income will require later payment in most cases. The criteria for receiving such as bonus may vary by organization, possibly with different payment amounts tendered to different members based on their seniority, individual contributions, or other characteristics.

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