DEFINITION of 'Year-End Bonus'

A year-end bonus (sometimes called a "Christmas 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 on 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.

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 a 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.

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