Target Bonus

The bonus amount an employee is expected to receive if they meet — but don't exceed — their performance goals, expressed as a percentage of base salary.

A target bonus is the planned bonus payout at 100% performance achievement — the amount your employer expects to pay you if you hit your goals squarely. It's distinct from the maximum bonus (what you'd earn at exceptional performance, sometimes 150–200% of target) and the threshold bonus (the minimum performance level at which any bonus is paid at all). Target bonus is almost always expressed as a percentage of base salary: a 20% target bonus on a $150,000 base means you're expected to earn $30,000 in annual bonus if you perform at plan.

Target bonus is a central component of On-Target Earnings (OTE) — a term more commonly used in sales roles. For non-sales professional roles, you'll see 'target bonus' or 'annual incentive target' in offer letters. The same concept applies: if you hit your objectives for the year, you receive the target amount. Performance above target yields a multiplied payout; performance below yields a reduced or zero payout. The slope of this curve — how quickly the bonus accelerates above target or decays below it — varies significantly by company and role.

Target bonus percentages vary substantially by level, function, and industry. Individual contributors in corporate functions might see 5–15% targets; managers 10–20%; directors and VPs 20–40%; executives 50–100% or higher. Sales roles often have 50/50 structures where half the total OTE is base and half is variable at target, creating very high upside for overperformance. Understanding not just the target but the payout range — the floor and ceiling — gives you a complete picture of what you might actually earn.

When evaluating offers, always ask how the target bonus has paid out historically. A 20% target bonus sounds attractive, but if the company has paid out an average of 60–70% of target over the last three years due to missed company objectives, the effective bonus is 12–14% — a meaningful difference. Conversely, a company that consistently pays 120% of target on strong performance is more valuable than a company with the same target that rarely pays above 100%.

How Bonus Payout is Calculated

Most corporate bonus plans use a multiplier structure: your target bonus amount is multiplied by a payout factor that reflects combined company and individual performance. A common structure: company performance determines 60–70% of the payout factor; individual performance determines the rest. If the company hits 90% of its targets (payout factor 0.80) and you individually perform at 110% of goal (factor 1.10), your overall payout factor might be 0.80 × 0.70 + 1.10 × 0.30 = 0.89. You'd receive 89% of your target bonus. The exact formula varies — some companies use straight multiplication, others use weighted averages or separate pools for company and individual components.

Questions to Ask About a Target Bonus

  • What has the actual payout been as a percentage of target over the last 3 years? — historical payouts reveal whether the target is realistic or aspirational.
  • What determines the company performance component? — revenue, EBITDA, and other metrics will determine whether you're rewarded even if your individual performance is strong.
  • What's the maximum payout? — the ceiling at exceptional performance tells you the upside range.
  • Is the bonus discretionary or formula-driven? — formula-driven bonuses are more predictable and defensible; discretionary bonuses can be reduced or eliminated without a formal rationale.
  • When is the bonus paid? — Q1 payment for prior year means you need to be employed at payment date, creating a retention effect; some companies prorate for partial-year employees.
  • Are there conditions that result in forfeiture? — e.g. PIP, performance issues, or resignation before payment date.

Target Bonus vs. Guaranteed Bonus

Some offers include a guaranteed first-year bonus or a guaranteed minimum payout for the first year — often offered to compensate a candidate for leaving unvested equity or a bonus they would have received at their previous employer. A guaranteed bonus is explicitly not tied to performance for the stated period. After that period, it converts to the standard target bonus structure. Always clarify whether a bonus referenced in an offer is guaranteed or at-target: the difference is legally and financially significant if the company has a bad year.

Example

A marketing director receives an offer with a $160,000 base salary and a 25% target bonus, giving her a target total cash of $200,000. In her first year, the company hits 105% of revenue plan and she receives a strong performance rating. The bonus pays out at 115% of target — she receives $46,000 in bonus, $6,000 above the $40,000 target.