What is the difference between a bonus and an incentive ?

Difference between a bonus and an incentive

A quick post today, on the difference between a bonus and an incentive. We often use these two terms without making a true distinction, but in truth, they are slightly different.

Both of them cover elements of compensation that go above and beyond the normal, recurring income of the employee (base pay or basic + allowances). But they differ as follows :

A bonus is a payment which is backward-looking and usually discretionary or at least not expected from the employee(s). A decision is made to pay it to one, a group or all employees, based on criteria decided by management to reward past achievements, such as reaching a specific profit or some important milestones for the organisation, or in a totally discretionary manner.

So it is generally decided after the fact. A bonus is usually paid in cash, or sometimes in cash-equivalent such as stock options or other forms of equity. A bonus is non-guaranteed and usually on-the-spot (ie just after the ac tleading to its payment).

An incentive is a plan which is forward-looking. Payment is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan. The purpose of the incentive scheme is to influence behaviour to reach the objectives by providing an incentive to work towards the goals.

An incentive can be paid in cash or in non-monetary award, for example some gifts or travel (especially for sales). The incentive plan is not discretionary : if the upfront, agreed objectives are reached, the payment or award is made.

I have written in the past about the importance of using the right words in compensation communication. Different industries and different companies will use the same word in different ways and that’s OK, but it is important that within your organisation, all your official communication, especially in writing, be consistent in using your term of choice, whether you chose to use “bonus” or “incentive”.


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  1. Sandrine, perfect article – thanks
    As always, straight to the point and easy to understand.
    Keep up the good work!

  2. Most of the time people use bonus and incentive without knowing the fact.. appropriate word..now you made it clear..very nice article.

  3. Glenn Rickardsson says:

    Dear Sandrine,

    I’m replying to a five year old blog post, but I saw it shared on Linkedin just now so I hope you forgive me!

    I agree that incentive plans are defined and agreed upon in advance, with a clear understanding of the target, thresholds, what the payout is at x target achievement, etc. But “on the ground” these incentive plans are usually referred to as bonus (at least in the markets I’ve worked in).

    So to not confuse incentive plans what you’ve defined as bonus, I normally call these discretionary payouts “Gratification Payments”, or in some cases I’ve seen “Ex Gratia Payments” used.

    Thoughts on that?


    • Hi Glenn,

      Comments are always welcome ! After 5 years, it proves the topic was “evergreen” ;-).

      I think your choice of name for the discretionary bonus : “gratification payments” or “ex gratia payments” is totally fine and quite typical in some European countries. Also, if that’s how you call it, and your usage of the word is consistent over time, then it becomes part of the company culture so everyone gets to understand what it means.

      In my part of the world, where most people are expats and some don’t speak very good English, it might sound confusing to people – or they may even struggle a bit to read Latin on a payslip. So I like to stick to a simple word even if it is a bit less accurate.

      I don’t think it really matters as long as things are done in a legal way and don’t create undue expectations of payment, even when the bonus is supposed to be “discretionary” 🙂

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