should companies offer bonuses instead of raises?

by Alison Green on March 6, 2023

A reader writes:

My workplace wants to start giving out annual profit share bonuses in lieu of salary raises. Basically, the base bonus (which is based on how well the company does that year) would be multiplied by the number of years someone is there (so for the sake of simple math, if the base bonus is $500, then it would $1k for 2-year employees, $1.5k for 3-year employees, $2k for 4-year employees, and so on).

While it’s nice to get a lump sum at the end of each year, I know that this is no substitute for long-term career salary growth. As I gain more experience and contribute greater value to this company, getting bonuses in lieu of raises ultimately feels like they’re trying to get out of paying me what I’m worth. Am I wrong to think these bonuses would be drops in the bucket compared to the long-term salary potential of getting regular percentage raises? How hard should I be pushing back against this? And how do I push back politely?

I answer this question over at Inc. today, where I’m revisiting letters that have been buried in the archives here from years ago (and sometimes updating/expanding my answers to them). You can read it here.

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      1. Fluffy Fish*

        Yes they are. They are consider supplemental income.

        Im not going to link a site but google will give you lots of articles.

        1. Fluffy Fish*

          Note I’m not saying its not ultimately income.

          Im saying when you receive a bonus check your taxes are calculated differently. Which may have implications come tax time and what you ultimately get.

          1. Lilo*

            At least in the US, bonuses help me with end of the year taxes because they withold more.

          2. MCMonkeyBean*

            What you ultimately get is the same. They will likely withhold more from a bonus at the time that it is paid, but the amount of taxes you owe is the same and any amount withheld over what you actually owed would come back to you in your tax refund.

        2. JSPA*

          Terminology bingle. They are taxed the same, but may be handled differently, and are almost by definition timed differently, which can create a different default outcome.

          1. KatEnigma*

            Yes. They commonly have 28% income tax withheld

            If you aren’t in that tax bracket, it is refunded to you when you do your taxes. You don’t owe more taxes on a bonus than any other income. They just take more.

        3. JSPA*

          Terminology bingle. They are taxed the same, but may be handled differently, and are almost by definition time differently, which can create a different default outcome.

        4. YaBetterWerk*

          They are taxed differently at the time of payroll so that you don’t under pay. A bonus can push you into a new tax bracket, and if you didn’t use the bonus rate to process an employee might owe penalties due to underpayment.

          But, at the end of the year, once you’ve earned what you’re going earn, the wages are all taxed at the same rate for filing. So if that bonus rate ended up causing an over taxation you would get a refund.

          1. The Real Fran Fine*

            Yup, this is the only reason I get tax refunds anymore (because of my quarterly bonuses).

      2. Essess*

        Yes they are. https://www.bankrate.com/taxes/how-bonuses-are-taxed/#:~:text=A%20bonus%20is%20always%20a,22%20percent%20federal%20withholding%20rate.

        Bonuses are taxed at a flat 22% for supplemental income.

    2. goducks*

      No, they’re not. Bonus checks may be withheld at differently than a regular paycheck for a reasons that are tied up in how the withholding rules work, but as far as the IRS is concerned, bonus income is indistinguishable from regular wage income, and is all taxed the same.
      If the withholding for a bonus check results in too much tax being withheld, it will be returned as a refund at tax filing.

      1. Fluffy Fish*

        Yes and because not everyone’s tax rate is what the bonus withholding is it can affect how much you owe at the end.

        You may get it back, but for most people getting a certain amount in their salary is much preferable to waiting a year to figure out how much you may or may not have.

        1. LJ*

          I see what you’re saying. Your original comment was ambiguous because a lot of people *do* think that the different withholding rate is reflective of how much tax they owe on the money.

          I think we can all agree the crux is that it’s harder to plan around a lump sum vs. a steady monthly amount.

        2. Peanut Hamper*

          Yes, but “taxed differently” implies a different overall tax rate.

          The withholding is different, but the amount of tax you will owe overall will be the same either way.

        3. Cmdrshprd*

          It might be slight semantics but I don’t think it is.

          @fluffy fish you are right that bonuses are “withheld” at different rates compared to regular income, but as other pointed out at the end of the year (tax time) the bonus money is “taxed” the same as regular income. In that (all else being equal) you will still end up paying the same total amount of tax to the government no matter if you get paid $60k regular salary or $55k regular and $5k bonus salary.

          1. Fluffy Fish*

            it is absolutely semantics and i believe at this point it has been beaten to death.

            when i say taxed different i mean when i get the check it is taxed differently than my regular income checks are.

            you and others have made it very clear that when you say taxed differently you would take that to mean when people file their taxes.

            When I received a bonus for the first time I was very confused and it did have implications for me when I filed my taxes.

            by all means everyone else can pile on about how i should have said it a certain way but as my responses will still be the same there’s really no need for me to continue to explain.

      2. Bee*

        Yes – my income is both salary + commission, and the withholding on the commission is done at the highest possible rate because as far as they know I might make that much, but it comes back in my refund at the end of the year. And as long as bonuses are paid in December rather than in January, that should only mean a month or two before it’s corrected.

        (My company also does bonuses this way – the same percentage for everyone applied to your salary – but it also does raises, which is the way this should work.)

        1. Fluffy Fish*

          When I received bonuses they were paid in June as that was the end of the fiscal year.

      3. Prospect gone bad*

        Thank you! I’ve been on a bonus plan for years. It’s just income lumped together with your salary at tax time.

        Not sure why people feel the need to “fact check” this especially when they are wrong!

        “There may be tax implications” sounds smart but not if it’s not true

    3. Momma Bear*

      Yes. I got a surprise bonus but in the end it was heavily taxed and a one-time event. It didn’t make up for the fact that I didn’t get a real salary increase in three years. Ultimately I decided waiting on a maybe bonus wasn’t worth it and moved to a company that does at least annual COLAs + merit increases.

  2. Lilo*

    My immediate reaction to that is “that’s a trap”. A lot of my immediate concerns were the same as Alison’s.

    1. Significantly easier to yank bonuses than to adjust down salaries.
    2. If job searching elsewhere other organizations might view base salary separately from bonuses so it could make it more challenging to get a competitive salary elsewhere.
    3. This doesn’t take into account merit raises or COL increase

    Just a parade of big ol parade of no.

    1. High Score!*

      Exactly what I was thinking. I work in the US for a multinational company. They give everyone performance raises, cost of living raises (although these do not always keep up with inflation) and bonuses based on how much profit the company made. And these are all separate.

      1. The Real Fran Fine*

        +1

        This is how it should be done, though I know a lot of companies give a 2-3% “merit” increase each year, which is really just a small COL adjustment.

    2. Willow Pillow*

      I would add a #5 – salary increases compound while bonuses do not. An example with a $100k salary and 5% raise:

      Year 1: $5,000 increase, new salary $105,000
      Year 2: $5,250 increase, new salary $110,250
      Year 3: $5,512.50 increase, new salary $115,762.50
      Year 4: $5,788.13 increase, new salary $121,550.63
      Year 5: $6,077.53 increase, new salary $127,628.16

      A 5% bonus would always be $5,000.

      2. Parenthesis Guy*

        It isn’t clear from the question whether it would work that way. The base bonus has absolutely no connection with current salaries but rather profits. So, the question is whether profits will grow faster than the average COLAs, presuming that the percent going to profit sharing stays the same.

        In other words, suppose you have a company with 10 employees making $100k each. At the end of year 5, presuming a 5% COLA, they’re making $127.6k. Now suppose profits grow at 15% each year and started at $50k. In that case, they see a jump from $5k in year one, a jump on $5.75k in year two and so on and so forth. Of course, if there’s an 11th employee making $25k, then they’ll do great because they’ll get the same bonus as the people making $100k.

        The relationship isn’t fully clear.

        1. Falling Diphthong*

          Will profits grow faster than COLA?
          This seems optimistic.

          Assume the percent going to profit sharing stays the same.
          No reason to do this.

          A bonus that starts at $50K/year and grows 15% each year sounds… like someone spinning for more money from investors, promising great things down the road.

          A sound business could do bonuses as profit sharing and give merit and COL raises.

          1. I am Emily's failing memory*

            And not just profit, but per capita profit. As a company grows, it usually has to staff up, so if they have 8 employees and $1m revenue, they might grow to $1.5m revenue but have to hire two new employees. So take that $500k delta and subtract two salaries and two benefits packages right off the top. Then whatever percentage of the remaining increased profit is paid out as a performance bonus will now be split 10 ways instead of 8 ways.

            Performance bonuses are a great way to recognize a Widget Tooler for exceptional results or heroic feats in a single good year, and profit sharing is a great way to help employees feel a sense of ownership of their work – but in most jobs (sales being an obvious exception) neither is a great tool for reflecting when a Widget Tooler is becoming more skilled and experienced over time and the market value for their skills is increasing even if the company isn’t as a whole expanding at a comparable rate.

            And not just slow growth but a company could even see year over year contraction, even while some individual employees are nonetheless becoming more skilled and better at what they do. Either because external factors are at play (like say, a pandemic that forces a hospitality business to close or operate at reduced capacity for an extended time), or internal factors that don’t equally apply to all (like say, a software product ships with a critical bug that the people in HR and the admin staff had no control over, or a business loses customers because one of their managers goes viral being a racist twat on video and even though they fire him, the reputational damage is already done).

      3. fhqwhgads*

        It’s worse than that. The base bonus is from how profitable the company is and has nothing to do with salary. So company has a bad year? Zero increase.

        1. Falling Diphthong*

          This does have shades of “Just remember, no matter what you do, you get paid the same as Dave. Who is napping in the supply closet.”

          1. Random Dice*

            Exactly. “Oh so you’re saying you just want me to do enough not to get fired.”

        2. Queenie*

          Company has a bad year OR ownership decides to spend down the profits before closing the fiscal year. My current employer went on a spending spree last year. I got lots of new toys for my department, but that cuts into any PSPs (which I don’t have).

        3. Willow Pillow*

          I actually went a couple of years where I didn’t get any salary increase but I did get a bonus!

        4. Salsa Your Face*

          This is what happened to me when I worked for a company that funded retirement accounts through profit sharing. I started there in 2008 so I’m sure you’re not surprised when I report that there was no profit for several years and my retirement account was filled only with tumbleweeds.

        5. Ellis Bell*

          I worked for a company like this as my first professional job for four years, and the middle two had no profit, so no bonus. The first year was profitable, but I wasn’t paid anything because I had only worked part of the year and “hadn’t contributed an entire 12 months’ worth of work” to the company’s profits. The last year I was there was profitable, and they still tried to wriggle out of it. They said I had given notice “one day before the cut off for profit sharing” so they were not going to give me a bonus for the sake of one day. I got my union involved and they changed their mind.

      4. Gumby*

        If the bonus is as described in the post, it’s not 5% every year, it is base bonus times years of service. You still end up worse off, but not by as much.

        Given $100k salary and $5k base bonus —
        Year 1: $5,000 bonus, total income $105,000
        Year 2: $10,000 bonus, total income $110,000
        Year 3: $15,000 bonus, total income $115,000
        Year 4: $20,000 bonus, total income $120,000
        Year 5: $25,000 bonus, total income $125,000

        This, of course, ignores all of the other downsides.

        And it really depends on the base bonus amount and it’s relative value compared to your salary. Since the base bonus appears to be set as a straight dollar amount rather than a percentage of someone’s salary, it could work out favorably for lower-paid workers. Someone making $50k/ year in salary would still get the same bonus amounts as the person making $100k.

        Year 1: $5,000 bonus, total income $55,000
        Year 2: $10,000 bonus, total income $60,000
        Year 3: $15,000 bonus, total income $65,000

    3. Antilles*

      For #2 in particular, the way around it is the same way to handle it if your current organization is below-market: Answer with your desired salary range rather than your current actual salary.
      But the rest, yeah. #1 in particular is a killer because you know dang well that when the company hits a worse-than-expected year or costs rise or etc, they’re going to shrink the bonus pool and just say “meh, bonuses weren’t guaranteed anyways”. Whereas if it’s your actual salary, cutting it comes across as a major performance issues or demotion.

    4. Sloanicota*

      I would add, “how well the company does that year” is pretty subjective and the people at the top are definitely smart enough to ensure that comes out exactly how they want it to. The company might suddenly not be profitable even if sales are good, if they take on a big expense for example or hire on more staff, or in a million ways. I’ve definitely seen lots of places freeze wages and hiring during the pandemic even though financially things seem to be awfully strong (publishing is an example. They argued that the cost of paper went up and so did shipping, so nobody got raises even though shrinkflation was raging and book sales surged).

      1. Wilbur*

        Absolutely, my company does bonuses based on your salary and sends out the multiplication factor quarterly. Q4 the factor dropped pretty significantly without explanation, even though we had a great year. There’s no insight into how this factor is calculated. I wouldn’t accept a bonus instead of a raise. Your company isn’t doing it for you, it’s always for themselves.

    5. Clown Eradicator*

      It’s also a lot harder to pay your bills that are due monthly when you are getting a lump of your pay in one go as a bonus. You could prepay, save it, etc. But I feel like it’ll make things a lot harder.

    6. A Simple Narwhal*

      #1 is a great point, it’s so easy for a company to just be like “whoops it’s a bad year, no money for bonuses”, while also never being clear on what qualifies as a good or bad year.

      We get annual bonuses (on top of raises) and the last few years it seems to be that if the company is doing great most of the year but then ends on a not great quarter, the recent slump is what gets used as the marker for bonus determinations. But if we have a great last quarter all of a sudden it’s “oh well that was just one quarter, we have to take the whole year into account”.

      I can understand it to an extent it’s just annoying for bonuses to be based on a “heads I win tails you lose” situation rather than transparency.

    7. Chaordic One*

      It gives me nightmares of my old job at “Dysfunctional Teapots” where, after much hard work, employees were fired, and therefore ineligible for bonuses, on the day before the bonuses were to be awarded. The bonuses were earned during a fiscal year that ended on August 31, although they were not actually awarded until late in October. (October was scarey, but not because of Halloween.) If your employer tries pulling this bonus stuff, it’s time to find another job.

      1. ScarredByApril1*

        Wow. I worked at a company that had large annual layoffs the last several years they were in business, but they always did the layoffs on April 1, intentionally so that everyone received their end-of-fiscal-year bonuses on the last day of March. Leadership didn’t have a business strategy, and April 1 was always scary, but they tried to do right by their employees.

    8. Prospect gone bad*

      Also new employees may not believe bonuses actually get paid. Some companies withholding bonuses by making metrics to hit them impossible sort of ruined it for the rest of employers who want to use them as part of the compensation

    9. Alternative Person*

      Number 1 is a big issue at my job. I haven’t been around for the whole history, but the bonus has been a massive point of contention going back years, compounded by the lack of COLA in just as long.

      The union is slowly making progress on the issue as well as fighting battles on a couple of other fronts but the problem as far as I can tell is coming from Corporate management, not local or regional

  4. Dread Pirate Roberts*

    I assume this is true in the US as in other countries – a mortgage or other loan application would be evaluated based on base salary and not a discretionary bonus.

    1. I'm just here for the cats*

      I think you might be right because there’s nothing saying that the bonus amount is guaranteed like salary, because it all has to do with the amounts of profits.

      Also, love the username

    2. Slightly Above Average Bear*

      We just experienced that in September. My husband’s new position pays more overall, but compared to his old job, a bigger percentage is paid as bonuses. Even though he’s earning more, the banks would only count salary for the mortgage. Bonuses can be considered, but only if they’ve been consistent for 2 or 3 (I forget) years.

      1. Lemming22*

        This was our recent experience as well, needed a few years to “prove” the bonus was reliable. For the letter writer that might mean they have a lag in their income being recognized by lenders and increasing scrutiny as the bonus becomes a larger % of their overall comp.

    3. Parenthesis Guy*

      Mortgage applications do ask about bonuses. Unclear if they have the same weight as salary.

    4. Don't Call Me Shirley*

      Bonuses and commissions can be used to qualify, you just need them documented, same as self employed folks can qualify

    5. Varthema*

      Here in Ireland your bonus can give you a little boost (depending on the bank; they all have different approaches to how much of a boost and how many bonuses you have to receive before it counts). I think ours added a % of the average of my husband’s last three bonuses to our borrowing limit (I hadn’t gotten enough bonuses to count). But it’s 100% not as effective as even a small raise to your base salary. Here you can borrow only x times your salary and that’s it.

    6. becca*

      I live in affordable housing, which means that my income has to be below a certain level to qualify. I’m like…..$1000 below the maximum. If I got a bonus, I would lose my housing (specifically, they wouldn’t renew my lease; I wouldn’t be thrown directly into the street). Which is fine if you know you’re getting a bonus and can plan for it. But in 2021 I got a bonus that I didn’t know was coming, because my employer realized that the money they’d been setting aside in case the pandemic hit them really hard wasn’t needed. And generally speaking I’m always glad to get more money, but I need to get it in a way that allows me to plan.

  5. Former Retail Lifer*

    Bonuses are taxed as supplemental income. I lose a lot more of my quarterly bonus to taxes than I lose from my regular wages.

    1. FedEmployee*

      Not in the US they aren’t. In the US, bonuses are taxed as earned income. You may pay more in taxes due to withholding, but that will be taken care of in your tax return and tax refund.

    2. sam_i_am*

      That’s just the withholding, not the actual tax assessed on the money. At the end of the year, bonuses are taxed based on the same tax rate as any other income, but withholding is a flat 22%. If you’re under the 22% tax bracket, that means you’ll get a chunk back at the end of the year when you file.

      1. alienor*

        So they claim, but I just looked at my annual bonus stub from a couple of years ago, and the withholding was around 30-35%. I didn’t get a tax refund that year either.

        1. Reluctant Mezzo*

          You may not have been withholding enough from your regular salary or had other factors impacting your taxes.

        2. LJ*

          I mean, there’s no payroll conspiracy…. You take out federal, FICA, and state taxes at the prescribed rates. Brainstorming possibilities… Maybe you made more than 41k that year and were in the 22% tax bracket, and thus the 22% withholding was the right amount? Maybe you had some other income that didn’t have taxes withheld and that’s where the extra went?

          1. NotAnotherManager!*

            I assume that our payroll got a lot of complaints about 401K being withheld from bonuses because, every year at bonus time, we get a set of instructions on how to pause 401K contributions for bonus checks. (Which I get, I’ve had bonus checks reduced to nothing by the higher withholding, 401K contributions, etc.)

    3. Pescadero*

      Bonuses generally will see a higher percentage WITHHOLDING when issued, but when you file your taxes every bit of earned income is taxed at the same rate – so you get back/pay the difference at tax time.

  6. DJ Abbott*

    I hit the paywall so didn’t see Alison’s answer- I just want to say IME bonuses often don’t happen as promised. If it’s performance based, performance wasn’t good enough. If it’s profit sharing, profits weren’t high enough. I would never count on a bonus.

    1. I have RBF*

      IME, bonuses are more often fantasy than reality.

      If my income stayed the same year over year, and they said my “raise” was just going to be an unknown “bonus” at the end of the year I’d be looking to jump ship. Bonuses are usually “discretionary”, seldom as much as is implied that they’ll be, and at least in the US, extra taxes are withheld from them. (Sure, supposedly you get some of it back at tax time, but until then it’s a loan to the government.)

  7. the.kat*

    This is part of the reason I left my last job. They were offering bonuses instead of wage increases. It felt like they were playing chicken with wage hikes and inflation. If they could just hold out long enough for the job market to cool, they wouldn’t actually have to pay more in the long term.

  8. LawLady*

    It’s also worth noting that mortgage lenders require two years of bonus payments to consider that as part of your income for mortgage purposes.

    We discovered that this year. I changed jobs. My new job pays about the same as my old job, but about 1/3 of my annual pay is in a discretionary bonus. Our mortgage lender would only consider the regular base pay when they underwrote our mortgage (and our interest rate).

  9. Tired of Working*

    All of what Alison said, plus what she didn’t say:

    If an employee starts working at the company in February, how much of a bonus will they get at the end of the year? Will they get 11/12 of the one-year bonus, or will they get nothing? Will they have to work at the company for a year and eleven months before they get anything at all (not even a raise)?

    If an employee leaves the company before the end of the year, it appears that they get no bonus at all. The company should be prepared for a lot of employees to give their notice on January 2. (They wouldn’t give their notice in December, because they could be told to get out immediately, making them ineligible for the year-end bonus.)

    Are the employees supposed to take TPTB’s word for it that the company didn’t do as well this year as they did last year, so the bonuses will be less than what is expected? Or will TPTB show them the numbers?

    1. A Simple Narwhal*

      We get an annual bonus that is paid on March 1 and there’s always a slew of resignations shortly after. Around the end of February everyone starts wondering who’s about to quit.

      And in the reverse, whenever anyone quits between December and February we always know/speculate that they must have received a huge offer to jump ship so close to bonuses being paid out.

  10. Pete*

    It would also affect some of your benefits. Disability is limited to a percent of your base salary.
    And Life insurance is often equal to or limited to X times your salary.

    2. TomatoSoup*

      Additionally, if the employer offers matching on anything (e.g. retirement fund contributions), it is usually based on a percentage of your base salary. A higher salary can mean a higher employer contribution.

  11. AnonAnon*

    Red flag. But also a flag for me not to go above and beyond if my bonus is not tied to my performance.
    And that is concerning because if you already have people that are not meeting expectations, they may check-out even more, and the “higher performers” are going to continue to get dumped on.

    1. NotAnotherManager!*

      This would be a major issue for me as well. Under prior management, the deltas in pay between high performers and people who weren’t meeting expectations was negligible and demoralizing. To have them receive the same bonus as well? Nope, I was planning to leave as the new regime came in and revamped the entire system to be more merit-based.

      I am not someone who can just dial it back and do the bare minimum, either. In the work I do, it would impact people who are not involved in salary decisions and external parties, and I struggle with letting them down over things they have no say in.

  12. Shiba Dad*

    I’m not a fan of bonuses in lieu of raises. I’ve experienced promised bonuses not being paid out because “conditions changed”.

    1. AngryOctopus*

      Yep. It’s pretty easy for a company to say “oh it was a bad year, bonuses are cut this year” than it is for them to say “we’re going to cut your salary by 4%”. People are less likely to accept a salary cut than they are to accept that it’s “not a good year for a bonus” as well. All that to say, you can’t count on a bonus the way you do your salary/raises (even if the raise sucks, it still gives you more $ at the end of the day, at least).
      And by not giving you raises, they screw you over with everything connected to that–401(K) matches, the amount you contribute can’t go up by keeping the same percentage pay-in, life insurance doesn’t change, disability payments don’t change, you may not be able to qualify for mortgages/loans/etc. that meet your needs if the bonus isn’t consistent…these are all things that affect future you really negatively. I’d be pushing back on this. Seems like a way for the company to save money rather than anything else.

  13. Angstrom*

    Salary should be based on your performance. Profit-sharing bonuses are based on the company’s performance. Those are not the same.
    At a previous job, profit-sharing bonuses were a percentage(varied year-to-year) of one’s total salary over the previous 5 years. The rationale was that success one year is built on work from previous years. The same formula was applied at all levels and was generally considered to be fair. Bonuses were considered to be bonuses, and were not a substitute for regular reviews and raises.

    1. Not Tom, Just Petty*

      “Salary should be based on your performance. Profit-sharing bonuses are based on the company’s performance. Those are not the same.”

      Louder for the people in the back.

  14. DaniCalifornia*

    I would be upset if they changed their system to that. My current company offers profit sharing. It is a % based on how well the company did up to 20%. So the past few years they reached their top goals and we have all gotten the max which is 20% of our salaries (heavily taxed of course). The payout is in February and it coincides with our raises. If they changed to what OP is describing I would be looking for another job.

  15. urguncle*

    The *only* time I’ve been happy with a bonus pay-out was when I worked at a company that did quarterly profit-share bonuses (and they offered raises yearly). What seems to often happen within a year at a company is that they only take hardships into account and pay that out. If you had a terrible first half, but a great second half, they’ll focus on the terrible first half as a way to lower bonuses. At least with quarterly bonuses, it felt like we were rewarded for work that we most recently did; good or bad.

  16. Nikki*

    I’m curious how this will work in the future as new employees are hired. Say the base salary for a position at this company is $50K and it stays that way for the next 5 years while bonus amounts increase. Meanwhile base salaries for similar jobs at other companies have increased to $60K during that time. If a new employee comes on, will they be hired at $50K since that’s what everyone else makes? And would this company be able to attract top talent offering this lower salary, even with the explanation that they’ll make it up in bonuses? Or would future employees be hired at the going market rate, which would be unfair to existing employees? Seems like there’s a lot of potential for problems down the road.

    1. alienor*

      And would this company be able to attract top talent offering this lower salary, even with the explanation that they’ll make it up in bonuses?

      Nope. I recently had a final candidate for a position who wanted more than the salary I was authorized to offer. They were not swayed by the explanation that a bonus (which they would have had to wait more than a year to get based on their prospective hire date) would get them closer to what they were looking for. In the end they turned the offer down.

      1. Random Dice*

        It’s like when companies combined sick and PTO and holiday leave and pretended earnestly that it was actually for our benefit and not so they could screw us collectively over for profit.

      2. TomatoSoup*

        I can’t say I blame them. Not your fault, but I would definitely side eye a company saying, “We pay you less in the beginning and then in more than a year, we’ll give you a bonus.” Unless mortgage companies, utilities etc. will agree to be paid in futures on said bonus, absolutely not.

  17. Nonny Mouse*

    My current job promised profit-sharing bonuses the year I joined, and proceeded to make business decisions each year that ensured we never turned a profit. I’m very lucky to have managers above me who’ve advocated for me & my teammates to get merit-based raises in “addition” to the bonuses (which never materialize!).

    1. An Australian In London*

      Exactly so. It is trivial for this company to decide on the last day of the year to spend or make purchases such that on-paper profits are zero. This could even be as salary increases or bonuses for top management.

      1. Reluctant Mezzo*

        I’ve done financial statements and I know where a lot of that stuff ends up being hidden.

    2. I have RBF*

      Yeah, I had one job where they said “Oh, the salary is low, because we’re non-profit, but we have annual bonuses.” They did not, at least for the group I was in, have any sort of annual bonus.

      At workplaces that supposedly had bonuses I didn’t get anything more often that I got anything, and usually the bonus was < $2000, before taxes were sucked out of it.

    3. Artemesia*

      My son was at a company where a peer was offered a huge bonus if an important project was successful based on company profits. He launched and profits were huge — THEN they hired a new CEO and gave him a huge signing bonus which reduced company profits below the threshhold that year and the guy got stiffed on the promised bonus — because ‘we didn’t make profit targets.’ bonus plus salary increases — good. instead of — an attempt by company to hose workers.

  18. I Wrote This in the Bathroom*

    Oh that is my pet peeve. Suppose you’ve been at this company 15 years:
    Your salary is the same as it was 15 years ago.
    Your total income is the same as it was 15 years ago.
    Your 401K match is the same as it was 15 years ago.
    Plus what others said about life insurance and disability payments. And aren’t severance and unemployment amounts also based on your salary?
    Only way you can get your income to go up is by… wait for it… changing jobs. Which is what everyone at this OP’s company is going to do.

  19. There You Are*

    The notion that raises are based on merit but bonuses are at the whim of the company made me chuckle. It’s definitely how it *should* work but, at my company, the senior execs determine the [meager, below inflation] COLA percent and that’s what everyone gets. This year they decided that the “merit” raise is 3%.

    You could get rated “exceeds expectations” on every single metric and still get the 3%.

    You could be on a PIP and on your way to being managed out, and still get the 3%.

    We’ve been trying to hire for an open entry-level position on my team for the past six months and management cannot for the life of them figure out why so many people walk away after an offer has been made.

    It’s kind of funny because we’ve been ghosted by several new college grads who accepted the offer and then just went radio silent. No doubt, one of the other places they were interviewing with came in with a much stronger offer.

    1. Roland*

      Lol, they are just blatantly doing one thing and saying another, huh. If everyone gets the same raise, it’s not a merit raise, like different people can use different terms for but being tied to the individual somehow is pretty black and white imo…

      1. There You Are*

        The first year I worked here and was told that my “merit raise” was the same thing as what the CEO had just announced was the COLA “raise”, I blurted out to my then-manager, “So this isn’t a ‘merit’ raise, it’s a ‘Congratulations, you’re not being fired!’ raise.” And he couldn’t disagree. ¯\_(ツ)_/¯

      2. Random Dice*

        Honestly that’s such a deeply dishonest – I’d even say gaslighting, and I use that term sparingly – thing for management to do, I’d want to get out. Anyone who looks you in the eye and obviously lies, without shame or compunction, is devoid of all character. You can’t trust them ever.

  20. Anonymous Educator*

    Let’s say you make $60k and never got raises but did get 3% cost-of-living increases (not even proper performance-based raises), and let’s say the bonus was $500 every year. Here’s what that would look like (left side, COL increases; right side, “bonuses”):

    $60000 vs. $60,000.00
    $61800 vs. $61,000.00
    $63654 vs. $61,500.00
    $65563 vs. $62,000.00
    $67530 vs. $62,500.00
    $69556 vs. $63,000.00
    $71643 vs. $63,500.00
    $73792 vs. $64,000.00
    $76006 vs. $64,500.00
    $78286 vs. $65,000.00
    $80634 vs. $65,500.00
    $83054 vs. $66,000.00
    $85545 vs. $66,500.00
    $88112 vs. $67,000.00
    $90755 vs. $67,500.00
    $93478 vs. $68,000.00
    $96282 vs. $68,500.00
    $99170 vs. $69,000.00
    $102145 vs. $69,500.00
    $105210 vs. $70,000.00

    1. Sloanicota*

      Fascinating. Plus, the whole point of bonuses is that now they don’t have to give you any amount every year (to be fair, a whole lot of my jobs also didn’t offer 3% COLA every year).

    2. Parenthesis Guy*

      But profit growth is on average 11% per year for companies in the S&P. So, saying that the base bonus is $500 per year is an awfully big if.

      1. Reluctant Mezzo*

        Profit growth can often be whatever the bosses want it to look like. (they want it to look big to the stock market and small to the employees, just like property gets valued one way for loans and another for taxes if nobody is paying attention).

        Fiddly and likely against the law? Quite possible. Happens all the time? You bet.

  21. The_artist_formerly_known_as_Anon-2*

    I have been stating this openly for AAM – to bring in a tax expert, to explain how things ACTUALLY work with taxes. One of the myths – bonuses are taxed higher… (WITHOLDING is higher, but the taxes are based on your total income)… has been answered here.

    Other myths that need debunking =

    “If I get a raise it will put me in a higher tax bracket, and I’d take home LESS”… not true. Someone more eloquent on the subject than I should explain how graduated income taxes work in the United States.

    “I got a retroactive raise lump sum payment going back two years but, gee whiz, the taxes all come out in the wash, right?” Not necessarily.

    “I got a raise and my refund was smaller”… underatand that your tax refund is NOT a gift. It is not a direct reflection of how you were taxed. Your “refund” is what you OVERPAID in withholding during the year. Basically, the IRS is returning YOUR money to you.

    A suggestion I have = everyone, even if they engage a tax person to do their taxes for them – should , at least ONCE in your adult life – go through and do your taxes YOURSELF. You will then get an understanding as to how the system works.

    1. irene adler*

      Yes- this is an excellent idea!

      Might also throw in how taxes work when one is 1099.

    2. Hlao-roo*

      Someone more eloquent on the subject than I should explain how graduated income taxes work in the United States.

      I’ll give it a shot. I’ll make 3 example tax brackets:
      $0 – $100: 0% tax rate
      $101 – $200: 10% tax rate
      $201 – $300: 20% tax rate

      If you earn $100, you pay $0 in taxes ($100 x 0 = $0). You have $100 after taxes.

      If you earn $110, you pay $1 in taxes. On the first $100 you earn, you pay the $0 – $100 tax rate of 0% ($100 x 0 = $0). On the next $10 that you earn, you pay the $101 – $200 tax rate of 10% ($10 x 0.10 = $1). You have $109 after taxes.

      If you earn $200, you pay $10 in taxes. On the first $100 you earn, again you pay the $0 – $100 tax rate of 0% ($0 in taxes). On the next $100 you earn, you pay the $101 – $200 tax rate of 10% ($100 x 0.10 = $10). You have $190 after taxes.

      If you earn $210, you pay $12 in taxes. On the first $100 you earn, again you pay $0 in taxes. On the next $100 you earn, you again pay $10 in taxes. On the next $10, you pay the $201 – $300 tax rate of 20% ($10x 0.2 = $2). You have $208 after taxes.

      When you go “up a tax bracket” you are still left with more money after taxes that when you were in a “lower” tax bracket.

      1. The_artist_formerly_known_as_Anon-2*

        “When you go “up a tax bracket” you are still left with more money after taxes that when you were in a “lower” tax bracket.”

        Exactly, but some crooked (or very stupid) managers will use the “tax bracket” argument in denying a raise.

        And. unfortunately, some swallow it hook, line, ‘n sinker.

    3. The Gollux, Not a Mere Device*

      I think this mistake is left over from a time when people in the top tax bracket were taxed at a higher rate than they have been in the past few decades, and people might say “if I get a $5000 raise, that will put me in a higher tax bracket, so my net gain will only be $750, is it worth me working that hard for $750?”

      That’s long enough ago that people are carelessly repeating things that their parents or grandparents said, or from old fiction. It was a running thing in Rex Stout’s Nero Wolfe mysteries, in the 1950s, as part of Wolfe having decided on an annual income that would be as much as he needed, so he sometimes turned down boring jobs even when people waved checks at him. Anyone who was old enough to be working in 1960 is now well past retirement age.

    4. hellohello*

      I got a bonus for the first time in my life this year learned just how prevalent the “you pay more in taxes on a bonus than on regular salary” myth is. It is genuinely confusing, because your withholding is different, and if the bonus is big enough it might end up affecting your tax bracket. Almost everyone I mentioned my bonus to thought believed the “they are taxed higher” myth, and defaulted to assuming they were right until I did some deep googling on it.

  22. Ashley*

    Amongst all the other issues this can screw with your 401(k) contribution and match. Some places for reasons unclear don’t even let you divert bonuses into your 401(k) though I think the norm is more of you are at a percentage they will for that percentage.

    1. AngryOctopus*

      We get paperwork every year saying if we don’t want 401(K) percentages coming out of our bonus, we have to fill out a form by a certain date. But even if they automatically take from their bonus, it’s still going to be less overall than what the employees here will be missing from potential increases from salary going up/company match potential.

      1. The Real Fran Fine*

        My company takes 401k contributions out of all our bonuses and applies their company match to it as well. At first, I was annoyed that I wasn’t given the choice as to whether I wanted that money diverted into my retirement account. However, it’s allowed me to play catch up in that fund much quicker than I otherwise would have been able to (there were years where I didn’t contribute to retirement at all), so now I love it.

  23. J*

    Honestly company performance based bonuses are probably counterproductive given the increasing education and changing attitudes around worker’s rights and wealth inequality over the last few years. People are a now a lot more likely to recognise that “a company doing well” = “a company making a lot of money for the already rich owners due to our hard work”, and bringing that to the front of everyone’s minds each year while giving them a tiny fraction of the owners’ share isn’t really gratitude inspiring.

    1. The Real Fran Fine*

      Yup. My current company did the profit sharing bonus thing one time since I’ve been here, I don’t think it went over well, so they switched to RSUs and employee stock purchase plan options instead.

  24. Essentially Cheesy*

    No. Nooooooo. This affects long term financial situations like 401k/retirement, Social Security, company-offered/sponsored life insurance levels/benefits .. and the list goes on. I would never agree to bonuses instead of annual raises.

  25. Mandie*

    At every single company I’ve worked that had profit sharing, I saw it yanked during “hard” times – and it rarely ever came back. It’s a nice perk, but I never factor it into my total compensation. If I need to make $X annually, that’s what my base salary needs to be.

    The company is totally doing this to get out of offering any kind of increase in the not-so-distant future.

    1. Helewise*

      This is exactly right. My husband got a reliable bonus for over a decade – the amount varied, but it was always a considerable part of his annual income, until two years ago when the bonuses vanished. We’ll see if they ever come back, but we just did our taxes and it’s a big hit.

      I probably wouldn’t immediately leave a job over this, but I’d plan on getting my feelers out within the next few years. I personally wouldn’t be willing to stay long-term at a company with this policy.

  26. Thinking about lunch*

    My nonprofit workplace has a similar bonus structure, but in addition to years of service, does factor in performance. It is still very skewed based on tenure, and the overall base bonus and bonus budget available depends on the amount of surplus in salary budget at the end of the fiscal year – essentially if more people quit and we don’t replace them for a couple of months, we’ll end up with more money in the bonus pot.

    Because of this, bonuses for staff with the agency for less than 5 years (most staff) are usually meagre, while bonuses for staff over 10 years can reach a couple of months’ pay.

    Meanwhile for raises, we’ve had several years without and then in 2022 had a 3% raise for most staff, due to the lack of funding increases, so we couldn’t sustainably afford raises. So far we haven’t had a year without bonuses yet, but this could definitely change.

  27. English Rose*

    Apart from all the reasons people have said it’s a bad idea for the employee, it’s also a bad idea for the employer.
    Bonus paid out end of year = mass staff loss within the three months following as people hang in to get their bonus before moving on.
    And new staff hired on at market rate while existing staff pegged to historical rates makes for an immensely complicated payments system.
    Apart from the other employees, I think I’d resign if I was asked to handle payroll for this company!
    Bonus in addition to fair market rate salary sure, but instead of? No.

    1. LJ*

      I get the arguments about attrition and also the problematic nature of new staff vs. existing staff, but I’m not sure that I follow why the payments system would be ‘immensely complicated’. Sure Alice, Bob, and Jill can all make different salaries doing the same job, but isn’t that normally the case anyways (with regards to the literal running of the payroll)?

  28. KatEnigma*

    Bonuses are never guaranteed.

    Not even the “we always pay 8% bonuses. Even during the recession, the board opted to pay bonuses instead of dividends” kind. It wasn’t untrue

    The second year my husband worked for that company, they didn’t pay out bonuses.

    It’s a lot harder to just decrease everyone’s salary.

  29. Somehow_I_Manage*

    At the end of the day, the main reason for a company to do this is to give the company financial flexibility to weather a storm by maintaining a lower payroll obligation year to year. Great for ownership. Not great for you.

    Profit sharing is a nice perk, but if you’re outside of ownership, it’s best to consider it a true “bonus” and not reliable income.

  30. Cathy*

    My department was bonus eligible at my last company, but somehow the company never hit the targets for us to get the bonuses, even though they made plenty of profit. The goals were basically unobtainable. We never did get a bonus while I was there.

  31. Thin Mints didn't make me thin*

    They should, of course, give both. And companies that do not offer employees a path to personal financial growth will shortly be scrambling for talent, if they aren’t already.

    Employees are not stupid. We work to sustain ourselves and our families.

  32. hellohello*

    I wonder how this type of compensation compares to commission based compensation. Having worked with sales teams before, I know they they frequently have relatively low base salaries and make most of their money in commission – in that case it’s obviously somewhat more in their control and less likely to be yanked away on a whim (at least for past sales), but it still leaves you with the issue of your base salary being much lower than what you actually make.

    1. Boof*

      it’s different if it’s a clearly stated % of your own work, which you’re going to know, vs some nebulous pool of money that can be “adjusted” by just spending a lot, on just about anything.
      The nearest analogy to a sort of group commission would be is if it was a bonus based on gross sales [or income] of a company instead of net profit; very different!

  33. Samwise*

    Plus the bonus doesn’t get factored into retirement funding I bet.

    And no guarantee you’ll get it again next year.

    (Jelly of the Month Club. The gift that keeps on giving the whole year. Maybe learn Clark
    Griswold’s rant and share it with your employer)

    1. H3llifIknow*

      When we got our bonuses, if we didn’t explicitly go in and STOP the 401K contribution, 10% was taken out for that, as well as ~40% taxes. We all laughed at what a joke our bonuses ended up being.

  34. Varthema*

    The *only* time this worked out as beneficial in my experience was at the end of 2020 (or 2021? time has lost all meaning) at the architecture firm where my partner works. They’d actually had a bumper year despite the pandemic because of previous contracts, BUT predictions were very doom and gloom for the economy and building industry in the following year. There was worry about there not being much work once those contracts ended, and thus layoffs. So the firm did generous bonuses that year instead of raises. That seemed to make sense to me, because apart from keeping the liabilities lighter for lean times on the company side, if someone got a raise in December but was laid off in April they wouldn’t have gotten very much actual money out of it.

    But that’s a fairly unique one-off decision. Definitely, definitely a horrible permanent plan.

  35. Squamous & Rugose LLP*

    Much like Betteridge’s Law of Headlines, the answer to the question “will this sudden change in remuneration policy benefit me, or my employer?” is always, always the same.

  36. pookie87*

    With a year end bonus in lieu of a raise you miss that “compound money” working for you. If this year you get a 2% raise, that 2% increases what your next year’s raise is based on. IMO the raise is much more valuable.

  37. yala*

    I would appreciate either.

    We don’t get raises. We get “cost of living adjustments.” Which are still merit based. And also don’t even cover the increase of our insurance, let alone the living part.

  38. Technically a Director*

    My employer tends to use an annual bonus in lieu of a raise explicitly to prevent salary inflation.

    More specifically, when an employee is at or near the top of the market-adjusted salary bracket for their level, and has exceeded expectations but not yet demonstrated that they are ready to be promoted. It’s a way of showing gratitude for exceeding expectations in ways that benefit the company, but are not directly related to day-to-day job responsibilities.

    (Note: this is specifically for the “bonus in lieu of a raise after comp review”… there are lots of other bonus types in my environment as well.)

  39. TomatoSoup*

    There are many, many practical reasons for doing raises instead of bonuses listed above. Even if they didn’t exist, I would still prefer a raise because of how I think/feel about budgeting. Even if it is the same amount spread out over the year, lump sums feel like something to be budgeted separately from my monthly budgeting since it isn’t accessible on a monthly basis.

  40. Ann O'Nemity*

    I like bonuses to reward extraordinary performance, to compensate for temporary assignments that go beyond normal job duties, and in lieu of crazy COLAs when inflation is predicted to be temporary.

  41. H3llifIknow*

    Bonuses are an awful idea in lieu of a raise. My former employer gave out bonuses once you reached a certain level and were “part of the bonus pool” and made a big deal out of it. But there are downsides, such as those in the bonus pool didn’t get raises at the same rate as the rest, and they’re taxed at the “Supplemental Salary” rate so close to 40%, meaning my $10K bonus was around $5500 after all was said and done. I’d have MUCH rather had a $10K raise. When I moved to a new position, I asked for a salary equivalent to my former salary PLUS bonuses, and a little extra and I got it without a blink. I’ll never go back to a bonus vs raise system company. I did get a sign on bonus, but that was outside of the salary negotiations. Having that extra bump every payday was SO much better than a one time, couldn’t be counted on, semi-nice lump sum. If you can argue for raises instead, I 100% would do so.

    1. Jen*

      It’s been covered in other comment threads above, but bonuses aren’t actually TAXED at a higher rate, they’re just WITHHELD at a higher rate. So it should even out when you do your taxes at the end of the year.

      1. H3llifIknow*

        They withheld ~40% for taxes. So semantics aside, I got 40% LESS than the bonus I was told I’d get… because …taxes. And no, I didn’t get it back at tax time.

  42. Catabouda*

    Many moons ago I worked for a company in Accounting that had annual bonuses based on sales. If sales were going great, we’d accrue an expense each month knowing the bonuses were due. If we got told to stop doing that monthly accrual. So, those of us in Accounting knew exactly what the higher ups were thinking about the odds of paying bonuses that year based on what they had us accruing (or not) each month.

    For my position, the metrics were based on how many invoices were processed. So, if our base expectation was 200 a week, our bonus metric would be 300 a week. Once I saw that the annual bonuses weren’t going to be paid, I stopped working as hard to meet the bonus metric.

    The supervisors were always confused about why we’d ignore the bonus metrics, as if we should keep working that hard for no reason. They tried to tell us – we should WANT to work harder, get better, whether the bonuses were paid out or not. Yeah, none of us were falling for that nonsense.

  43. VioletBird*

    My company does both of these things (profit share and paying about 1/5 of my salry as quarterly bonuses) and two more drawbacks to consider:

    – In the state of Maryland a least, it’s legal for the employer to not withold state and federal taxes from bonuses. So I get slammed with a huge tax bill every year.

    – Our profit share only vests a certain amount for every year that you are employed at the company. So it’s very possible that you’ll miss out on a big chunk of money if you decide to leave (or are conveniently let go) before five years.

  44. Kelly*

    I worked at a veterinarian under ProSal. Which is basically a base salary + commission based on production. Unfortunately at this practice it was only paid once per year and the work was highly seasonal. The year I quit that hellhole I busted my rear working the entire busy season 60+ hours a week, but because I left in July I didn’t gross enough for the year to make any commission. I lost about $5k that way in the poorest paid field in the industry. Also when your employer controls the numbers and bonuses and doesn’t give you access it’s really easy to pull some fuzzy math. I’m pretty sure I lost thousands more that way with no way to prove it in previous years. My boss also started stealing my clients so he wouldn’t have to pay me for the “easy” work that’s our bread and butter in order to make up for his own poor financial decisions.

    I will never work under a yearly bonus program again.

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