DEFINITION of 'Year-End Bonus'

Year-end bonus is a reward paid to an employee at the end of the year. Many year-end bonuses are tied to performance metrics and the amount can vary depending whether certain milestones are met. Year-end bonuses are usually made up of lump-sum payments used to reward the individual for hard work and dedication.

Sometimes called a "Christmas bonus.".

BREAKING DOWN 'Year-End Bonus'

On Wall Street, it is common to see top executives and employees of financial firms receive large bonuses at the end of the year. Bonuses fluctuate depending on the economy and the year's performance, but in most years the amount is substantial.

How Year-End Bonuses are Determined

A year-end bonus can be offered by any size company, typically when the overall sales and profit goals for the year have been met or exceeded. The company may aim to offer year-end bonuses on a regular basis, or only offer them after an exceptional performance. These bonuses may be structured based on the employee’s salary, how well they met personal goals such as achieving sales targets, or other measures. In many examples, the year-end bonus is a taxable increase in salary, which means the actual take-home pay may not be as large as anticipated. Furthermore, the size of the bonus could elevate the employee’s salary to another tax bracket, which may force them to pay an even higher tax rate against their entire compensation for the year. That can lead to the employee owing money when they file their income taxes due to the sudden bump in salary at the end of the year.

 The size of the bonus might also stem from the pay grade of the employee, with larger percentage boosts to salary offered to more senior staff and executives.

Some companies might offer year-end bonuses as a contractual part of an employee’s salary as way to encourage superior work performance on a consistent basis. Contractual year-end bonuses are more often offered to executive management when they are hired or promoted, and might not be tied to the company’s performance at all. In this capacity, the bonus can serve as a hiring and retention tool to keep key personnel onboard with a company when job openings at rival companies offer higher base salaries.

If a company misses its targets or otherwise underperforms, however, it is possible that a company will withhold year-end bonuses for some, if not all individuals on the payroll.

Year-end bonuses that are not derived from cash may also be offered. This can include supplemental vacation days or gifts.

RELATED TERMS
  1. Retention Bonus

    A retention bonus is a financial incentive offered to a valuable ...
  2. Bonus Issue

    A bonus issue is an offer of free additional shares to existing ...
  3. Cash Or Deferred Arrangement - ...

    The method of funding any type of qualified profit-sharing or ...
  4. Base Pay

    Base pay is an employee's initial rate of compensation, excluding ...
  5. Earned Income

    Income derived from active participation in a trade or business, ...
  6. Non-Qualified Plan

    A non-qualified plan is a tax-deferred, employer-sponsored retirement ...
Related Articles
  1. Personal Finance

    What Drives Investment Banker Salaries

    Do investment bankers make too much money? Are their salaries completely arbitrary or is there some logic behind it?
  2. Managing Wealth

    5 CEO Bonuses Worth More Than You'll Earn In A Lifetime

    We look at some corporate head honchos who are in the running for the fattest bonuses in 2010, and what they've done to earn them.
  3. Investing

    Deutsche Bank to Cut Bonuses by About 80%

    The embattled German bank is attempting to shore up its finances after a string of fines.
  4. Personal Finance

    Morgan Stanley Introduces Four Weeks of Paid Vacation

    In the wake of falling bonus pools and loss of top talent to Silicon Valley, one of Wall Street's biggest names is introducing a paid four-week sabbatical.
  5. Investing

    Bonuses Inch Up as Wall Street Profits Return

    Wall Street bonuses increased in 2016 as the securities industry saw a 21% increase in profit.
  6. Investing

    Netflix CEO Pocketed $24M—Mostly Via Stock Options

    As cash bonuses continue to decline, a Netflix exec profits mostly through stock options.
  7. Personal Finance

    Wall Street Bonuses Fell 9% in 2015 (BAC, GS)

    The average Wall Street bonus fell 9% in 2015 as market volatility and litigation weighed on the securities industry.
  8. Investing

    Netflix Sued for Allegedly Rigging Execs' Bonuses

    Netflix has been accused of rigging its previous bonus system in order to dodge tax penalties and hand out huge cash payouts to its senior employees.
  9. Investing

    What Should You Do With Your Christmas Bonus?

    Should you spend your Christmas bonus or save it? Here are a few ideas for what to do with that little extra something in your check.
  10. Taxes

    Five Tax Strategies For A Bonus Or Windfall

    That bonus for a job well done or inheritance from Great Uncle Alfred can often result in your paying a bigger chunk of money to the Internal Revenue Service.
RELATED FAQS
  1. How do mutual fund managers make money?

    Learn about the compensation structure for fund managers and how investors can obtain information on managers' base salaries ... Read Answer >>
Trading Center