The Pros and Cons of Getting a Bonus Over a Raise

The Pros and Cons of Getting a Bonus Over a Raise

Those of us hoping for a salary hike this year weren't thrilled by industry forecasts that the average raise in 2017 would be a meager 3% — not so different from the paltry pay hikes of the past few years.

The one bit of bright news? That boost in compensation you're looking for might actually come in the form of a bonus: 77% of big North American companies plan to give bonuses this year, up from 63% three years ago, according to recent Salary.com statistics reported in USA Today. So rather than see some padding in your regular paycheck, your company may be planning to make it up to you in the form of spot bonuses, individual incentive bonuses, profit-sharing, referral bonuses or other forms of performance-based pay.

There are, however, pros and cons to seeing more of your compensation come from bonus pay, so if your company is making that shift, know what they are so that you can prep your finances accordingly:

THE PROS

It acknowledges you for your hard work. Spot bonuses and individual incentive bonuses can be a good motivator when you'd otherwise only have a cost-of-living increase to look forward to. After all, if you've been meeting your goals and the rest of your department hasn't, why not get a little love for your extra effort?

You may not need to be an executive to get one. Incentive pay and bonuses have traditionally been set aside as a perk for executives, but over the past few years, they've become increasingly popular across all employee ranks.

It could help you in your next performance review. When prepping for your next convo about pay raises with your manager, you need to come to the table with what you've accomplished since your last review. If you received a bonus for reaching specific goals and metrics, then you already have tangible evidence that you've proven your worth.

THE CONS

You could see a bigger tax bite on that money. Depending on how your company chooses to pay out your bonus, either as a separate check or as part of your regular paycheck, you could be subject to a bigger tax withholding because your bonuses are categorized as supplemental income.

A flat base pay could affect other benefits you get. If your company is boosting your bonuses in lieu of an increase in base pay, any perk you get that is tied to your base pay won't see the same jump. For example, your disability insurance helps cover a portion of your base salary (not your bonuses) if you become too ill or injured to work. And if any incentive pay your receive is tied to a percentage of your base salary rather than a flat figure, then you'd obviously have been better off if your base salary were higher.

Bonuses aren't guaranteed. Even if your company has always made good on its promises to give you the bonus you were expecting, the fact is, there is never a guarantee of that — especially if any part of that compensation is tied to companywide goals versus individual performance.

And the higher up you are, the more likely your pay will be tied to company performance: 68% of companies tie their directors' and managers' compensation to overall company performance, while 77% tie their executives' pay to company performance, according to a 2017 compensation report from Payscale.com. That means you have to have a backup plan for how it would affect your budget if you don't end up getting the extra pay you were expecting (including having a well-stocked emergency fund!).

You may not be able to use your bonus pay as a negotiating tool with your next employer. Although you can certainly tell prospective employers what your total compensation is, including any incentive pay, they may not necessarily be willing to meet that figure if they have strict pay grades or incentive plans in place that don't give them much negotiating leeway. If everyone in their company only gets up to a 10% bonus every year, for instance, then you're likely not going to be able to negotiate a 20% bonus just for yourself.

RELATED: Half the Country Got Raises This Year. Here's What to Do if You Didn't

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