Target bonus: Overview, definition, and example
What is a target bonus?
A target bonus is a pre-established, performance-based financial incentive that an employee or individual may receive if they meet specific performance goals or objectives set by their employer or organization. The target bonus typically represents a set amount of money or a percentage of the employee’s salary, and it is often linked to the achievement of personal, team, or company-wide goals. While a target bonus is an expected amount, the actual bonus paid may vary depending on how well the employee meets the performance targets.
For example, a sales manager might have a target bonus of $10,000 if they reach their sales quota, but if they exceed the quota, they might receive a higher bonus.
Why is a target bonus important?
A target bonus is important because it serves as a motivating tool for employees, aligning their personal performance with the organization’s goals. By offering a performance-based incentive, companies encourage employees to work toward achieving specific outcomes, whether it’s meeting sales targets, improving customer satisfaction, or achieving financial milestones. Target bonuses help attract, retain, and reward top talent while ensuring that employees are motivated to contribute to the company’s success. They also offer employees an opportunity to increase their earnings based on their performance.
Understanding target bonus through an example
Imagine a senior executive at a tech company has a target bonus of $50,000, which is 20% of their base salary. The bonus is tied to the company's annual revenue targets, and if the company achieves its revenue goal, the executive receives the full target bonus of $50,000. If the company exceeds its goal, the executive may receive a higher bonus, such as $60,000. However, if the company only meets 80% of the goal, the bonus may be reduced to $40,000.
In another example, a salesperson at a retail company may have a target bonus of $5,000 based on sales targets for the quarter. If they meet or exceed these sales targets, they are eligible to receive the full bonus amount, but if sales fall short of the target, they may receive a reduced bonus or no bonus at all.
An example of a target bonus clause
Here’s how a clause related to a target bonus might appear in an employment contract:
“The Employee shall be eligible for a target bonus of [insert amount or percentage] of their annual base salary, based on the achievement of specific performance goals as set forth by the Company. The actual bonus amount may vary depending on the level of performance achieved, as determined by the Company’s review of the Employee’s performance and the Company’s overall performance.”
Conclusion
A target bonus is a key component of performance-based compensation, motivating employees to meet or exceed specific goals and contributing to overall organizational success. By linking bonuses to measurable performance objectives, companies can incentivize employees to strive for excellence while offering them the potential for additional earnings. Understanding how target bonuses work helps both employers and employees set clear expectations and foster a productive, goal-oriented work environment.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.