Are there any downsides to having a bigger salary rather than a bonus?

Question

My company has consistently given out bonuses for the past few years and the bonuses have been gradually rising each year. Currently the bonuses are around 15-20% of my annual salary.

I spoke to my manager about potentially moving some of this bonus to my salary instead - as this would allow me to get a bigger mortgage as, here in the UK at least, mortgages are based on salary and not volatile earnings such as bonuses, commission etc. and they seemed open to the idea.

For example, if my base salary is £28,000 and my bonus is £7,000 this would mean I could get a house at approximately 5 x £28,000 = £140,000. However, if I got a salary at £33,000 and a bonus of £2000, this would mean that I could get a house at approximately 5 x £33,000 = £165,000 (assuming I could afford the deposit and monthly payments). This would allow me to get a significantly better house whilst being of no additional cost to the company and meaning I would still pay the same amount of tax, NI contributions etc.

Are there any downsides to this for me?

Answer 1

There is no downside for you but there is for the company.

If the company has a bad year, it can stop your bonus but it can't reduce your salary (or at least that is much harder to do).

When is the last time you got a raise? Since you are getting good bonuses you seem like a valuable employee. Why not just ask for a raise without mentioning your bonus?

Answer 2

When I was working, my wife and I were both in sales, and our total income averaged about 140% of our "salary". For purposes of a mortgage, banks looked at a 3 year average. Imagine if our entire income were the same, but it was all considered 'commission' or 'bonus'. That would be tough if the bank insisted on seeing a fixed salary only.

Answer 3

The downside is primarily that the company won't be willing to give you as much money in salary raise as it will in bonus.

Salary raises are cumulative, first off; so if you get a Cost of Living raise every year of 2-3%, if your starting salary is $100k, your 2% raise is $2k, but if your starting salary is $120k, your 2% raise is $2.4k, while if you have a 20% bonus instead, your raise is only $2k still. Your next year bonus is, of course, higher by that same amount ($20.4k), but the company will still be likely to give a lower raise knowing it will impact your future salary more than a bonus will if bonuses ever are not given.

Second, salary raises are harder to remove, and don't go away in bad years - so the company has to factor in the odds of the bonus not being granted. Even if you do really get the bonus every year, there's a reason they give you it as a bonus. So, they would have to give you a smaller salary raise in exchange for a bonus, both to keep their risk profile the same and to avoid favoring you over employees still on the bonus system.

That may still be worth it to you - maybe a definite 15% boost is worth forgoing a usually 20% boost. Only you (and the company) can decide that, through negotiation.

Answer 4

With the same total value, there is one downside for you to increasing your salary in place of part of a bonus: you get the extra salary spread out over the next year, instead of getting all of it immediately.

The upsides are overwhelmingly more important unless you are in desperate need of immediate cash, however. The most important upside by far is that a salary increase gets paid out repeatedly, becoming part of a new baseline.

If you get a $10k bonus one year, and get another $10k the next year, you get $20k total. If you instead get a $10k raise the first year, then you get that $10k again the next year automatically, and any reward for the second year gets added on top of that. A $10k raise in the second year too would add up to getting $30k instead of $20k for the two years. And more again for the third year, and the fourth, and so on.

This is such an enormous compounding benefit that it may be worth trading a bonus for half the amount or even less as a salary increase. Such a trade may even be mutually beneficial for both you and the company for three reasons:

• You and the company likely care different amounts right now about what you'll be paid multiple years in the future.
• Some of the benefits to you, such as the mortgage issue that prompted you to ask, come from sources outside the company.
• Some of the benefits to you often stay with you when you move on to another job, passing the cost to your new employer. In particular, many companies use salary at your previous job as a benchmark for approximately how much they should offer you.

Answer 5

Someone mentioned in a comment:

you can do bonus sacrifice and pay it into your pension. You would save tax if you’re a higher rate payer now,

Here in Canada, I can send a bonus directly to my RRSP (self-saving for retirement; what you pay in is deducted from your income in calculating this year's taxes) without any tax with-holding. The comment makes me believe this is also possible where you live.

How it works here: for example, a 20K bonus might normally get 30% or 40% withheld if paid directly to you. You would actually receive say 14K if 30% was withheld, and put this into your RRSP, then later do your taxes, and when all was said and done get a 6k refund, which you can put into your RRSP but probably about a year later than when you got the bonus. Whereas if you ask your employer to put it directly into your RRSP, nothing is withheld. The whole 20k goes into the RRSP. You do your taxes, add the money into income and then subtract it because you put it in the RRSP, and you don't get any kind of refund, but a significant fraction of the money spends a year longer in the RRSP than it otherwise would have.

If you were able to persuade your employer to guarantee you some or all of your bonus forever by making it salary (a big if and one I doubt they would do) this put-it-straight-into-retirement-savings move would not be possible with a piece of your salary. That is a small downside, though perhaps not one that looms large to you as you prepare to qualify for your first mortgage.

Answer 6

The tax on a bonus is probably going to be more severe then the lost interest on that money as you are getting it at a later date.

The obvious benefit of having a higher salary is that now you get that every year and if you go up the ladder you are supposedly working from a much higher spot.

However... Big Example

We had an acquisition and about 50 people move to our center. They had a weird pay structure where they received 4 large bonuses every year. So someone might make 50k plus 25k in bonuses. Our company wasn't giving bonuses to non-managers. Now the guy is making 75k a year... Great right?

Well now they are way overpaid for their position. The over performers kept their jobs for a few years and kept the same salary or marginal increases for taking better jobs. The rest just wallowed.

Some people were passed off to jobs they would hate in hopes they would leave. (They didn't) It create tension at the company because we have a guy making 75k next to a guy making 50k and the 50k guy is performing way better.

Well long story short - as soon as their minimum contract was held (4 years) they all lost their jobs or took less pay (if they were good).

So yes higher pay is fine if it is within range of your title and skills but it is a target to get fired if you are getting paid too much. So yes it can backfire very quickly.