Henry Ford paid his workers a share of profits in 1914, and the practice became a fixed expectation.
The practice of employers distributing year-end payments to workers has roots in nineteenth-century patronage, when business owners occasionally gave seasonal gifts or gratuities to employees at Christmas.1 The word bonus itself comes from the Latin bonus, meaning "good." The transition from gift to institutionalized compensation practice accelerated in the early twentieth century.
In January 1914, Henry Ford announced the five-dollar day at his Highland Park plant, which included a profit-sharing component. Workers who met the company's standards of personal conduct qualified for a share of Ford Motor Company's profits, effectively doubling their wages.2 The announcement was front-page news across the country and established the principle that worker compensation could be tied to company performance.
Investment banks on Wall Street formalized the annual bonus into a defining feature of financial industry compensation during the second half of the twentieth century. By the 1980s and 1990s, bonuses at major banks routinely exceeded base salaries, creating a compensation structure in which the majority of a banker's pay depended on annual performance assessments.3
The 2008 financial crisis brought public scrutiny to bonus culture when firms that received government bailouts continued to pay large bonuses to executives. AIG paid $165 million in bonuses to employees of its Financial Products division, the unit responsible for the derivatives contracts at the center of the crisis.4