How an annual bonus works
An annual bonus is variable pay earned over a twelve-month period and paid after it closes. This guide covers the formula, the difference between weighted and multiplier plans, and the clauses that decide whether you get paid at all.
Reviewed 20 August 2026 · gross estimates, not payroll or tax advice
What an annual bonus is
Short answer
An annual bonus is variable cash pay earned over a twelve-month performance period and paid after that period closes. It sits on top of base salary, it is not guaranteed, and its size is set by a target percentage of salary multiplied by how the company and you performed. Most people receive theirs one to four months after the financial year ends.
The important distinction is between the target and the payout. Your target bonus is the amount the plan is designed to pay when everything lands exactly at plan — typically written into your offer letter as a percentage of salary. The payout is the target after performance, eligibility and any cap have been applied. People routinely quote their target as if it were their salary, then feel short-changed when the payout arrives at 80%.
Annual bonus goes under several names depending on the employer: AIP (annual incentive plan), STI or STIP (short-term incentive), management bonus, or simply “the bonus”. The mechanics are broadly the same.
How it is calculated
Weighted plans versus multiplier plans
There are two structures in common use, and they behave very differently when one component does badly.
| Multiplier plan | Weighted plan | |
|---|---|---|
| Formula | Target × company × individual | Target × (company × 70% + individual × 30%) |
| Company 60%, individual 120% | 0.60 × 1.20 = 72% | (0.60×0.7) + (1.20×0.3) = 78% |
| Company 0% | Nil — the multiplier zeroes everything | Still pays the individual portion, unless a gate blocks it |
| Feels like | Everyone shares the company’s fate | Personal effort still counts in a bad year |
Most large employers use a weighted plan with a gate: if company performance falls below the threshold, nothing pays out regardless of individual scores. Read your plan document for the word “gate”, “trigger” or “funding” — it is the clause that decides whether a bad company year wipes out your bonus entirely.
A worked example
Salary $95,000. Target bonus 15%. The company finished the year at 92% of its financial plan, which the plan converts to a 0.85 company factor. Your individual rating is “exceeds”, worth 1.2. The plan is weighted 70% company / 30% individual. You worked the full year.
95,000 × 15% = $14,250 target · weighted score = (0.85 × 0.7) + (1.2 × 0.3) = 0.955 · 14,250 × 0.955 = $13,609. Rounded to plan bands, $13,893. Educational gross estimate only.
Note what happened: a genuinely strong individual year recovered only part of a weak company year, because company results carry 70% of the weight. That asymmetry is the single most common source of bonus disappointment, and it is a design choice, not a mistake.
Model your own plan in the annual incentive plan calculator or the STIP calculator.
When it is paid, and what gets deducted
Annual bonuses are normally paid one to four months after the performance year closes, once results are audited and approved. A December year end commonly pays in March; a June year end commonly pays in September.
Two clauses are worth finding before you count on the money: the employment condition (must you still be employed, and not under notice, on payment day?) and the clawback (can the company recover it if results are restated or you leave within a period?).
Frequently asked questions
How is an annual bonus calculated?
Salary multiplied by your target bonus percentage gives the target. That is then multiplied by a company performance factor and an individual performance factor, scaled for eligibility if you did not work the full year, and finally limited by any payout cap. Most large plans weight company and individual results rather than multiplying them.
What is a good annual bonus percentage?
Target bonus is usually 5-10% of salary for entry and junior roles, 10-20% for professionals and managers, 20-40% for directors and senior managers, and 50% or more for executives. What matters more than the target is whether the plan actually pays at target, which you can ask about directly.
When is an annual bonus paid?
Typically one to four months after the performance year ends, once results are finalised and approved. A December financial year end usually pays in February or March.
Is an annual bonus guaranteed?
Almost never. Target bonus is an opportunity, not an entitlement. Most plans are explicitly discretionary, require company results above a threshold before any funding exists, and require you to be employed on the payment date.
Why was my annual bonus lower than my target?
The most common reasons are company results below plan, an individual rating below the top band, proration for a partial year, a payout cap, or a plan gate that reduced overall funding. Ask for the company factor and your individual factor separately, because they are different conversations.
Can my employer take back a bonus?
Some plans contain clawback provisions allowing recovery if financial results are later restated, if misconduct is found, or if you leave within a defined period after payment. Clawbacks are standard in financial services and increasingly common elsewhere.
Related tools and guides
Written and reviewed by the BonusPayCalc editorial team. Every formula on this site is shown on the page that uses it, so you can check it against your own plan document. Figures are gross planning estimates and not payroll, tax, legal or HR advice — see methodology.