HR Glossary  /  Discretionary Bonus
Discretionary Bonus4 min read
Table of Contents:

What is a Discretionary Bonus?

Bonuses are a great way for employers to reward their employees for their work and achievements. A discretionary bonus definition is an unexpected bonus given to employees at the employers discretion, rather than being tied to specific performance metrics. Not all bonuses are created equal and it’s important for employers and employees to understand the differences.

This piece will explain what a discretionary bonus is, how it differs from a non-discretionary bonus and what it means for the workplace. By understanding the differences employers can make better decisions on their compensation strategy and employees can understand their pay.

A discretionary bonus is a bonus given at the employers discretion. This means the employer has the power to decide if they want to give a bonus, how much and what criteria to use.

Key Features and Examples

  • Employer’s Discretion: The employer has sole discretion over the decision to award the bonus, meaning they can choose to give it based on their own judgment.
  • No Guaranteed Amount: Unlike contractual bonuses there is no set amount or guarantee of payment.
  • Performance-Based: Often linked to individual, team or company performance but not always explicitly stated.

Real-World Examples

  • Holiday Bonuses: Given during the holiday season as a goodwill gesture.
  • Performance Bonuses: Awarded based on overall company performance or specific achievements. The bonus amount can vary depending on employee performance and company circumstances, providing flexibility and motivation.
  • Spot Bonuses: Given spontaneously to recognize exceptional work.

What are Non-Discretionary Bonuses?

Non-discretionary bonuses are predetermined and guaranteed based on specific criteria outlined in employment contracts or company policies. Attendance bonuses are a common type of non-discretionary bonus, linked to specific criteria such as employee attendance.

Key Differences

  • Criteria: Non-discretionary bonuses are based on clearly defined criteria established by employers that employees must meet to qualify, whereas discretionary bonuses are based on the employer’s judgment.
  • Guarantee: Non-discretionary bonuses are guaranteed once criteria are met, while discretionary bonuses are not guaranteed.
  • Flexibility: Discretionary bonuses offer more flexibility to employers, whereas non-discretionary bonuses offer more predictability for employees.

Examples

Non-Discretionary: A sales commission based on specific targets. Referral bonuses are also non-discretionary, as they reward employees for recruiting new staff.

Discretionary: A year-end bonus given to employees based on company performance and the employer’s assessment of individual contributions.

Pros and Cons

Discretionary Bonuses

  • Pros: Flexibility for employer, motivational for employee, can be tailored to current business. When structured properly, such bonuses can enhance motivation, recognition and employee loyalty.
  • Cons: No predictability for employee, can be seen as unfair.

Non-Discretionary Bonuses

  • Pros: Predictability and clear expectations for employee, consistency in rewarding performance.
  • Cons: Less flexibility for employer, may not reflect current business.

Legal Considerations

Employers must comply with various laws and regulations when giving bonuses whether discretionary or non-discretionary.

Employer Responsibilities

  • Fair Labor Standards Act (FLSA): Non-discretionary bonuses must be included in overtime pay calculations.
  • State Laws: Vary by state but generally bonuses must be paid as per employment contracts or company policies.

To avoid legal issues when it comes to employee benefits, you need to clearly define discretionary and non-discretionary bonuses in employment agreements. It is also important to keep records of the criteria and decisions for discretionary bonuses to defend against disputes.

Employer Benefits

  • Flexibility: Can be tailored to current business. Clear guidelines for discretionary bonus programs ensure fairness and transparency in awarding bonuses.
  • Motivational Tool: Can be used to reward exceptional performance and behaviour.

Employee Benefits

  • Recognition: Employees feel valued and recognised for their work and contributions.
  • Extra Earnings: Opportunities to earn beyond salary. Regular bonus payments, especially retention bonuses, motivate and retain employees, and create loyalty and accountability in the workplace.

Motivation and Retention

  • Increased Motivation: Employees may be more motivated to go above and beyond if discretionary bonuses are possible. Discretionary bonuses must be implemented with clear guidelines so they remain truly discretionary and effective.
  • Retention: Regularly awarded discretionary bonuses can increase employee loyalty.

To effectively implement a discretionary bonus plan, begin by clearly defining its objectives, such as enhancing performance or rewarding exceptional contributions. Establish transparent and measurable criteria for bonuses, ensuring fairness and consistency. It's also important to regularly update the plan to reflect company goals and changes.

Enhance buy-in and fairness by incorporating employee feedback into the bonus criteria. This not only helps tailor the plan to actual employee needs and perceptions, but also fosters a sense of ownership and trust in the process. Maintain thorough documentation of bonus decisions to support transparency and justify distributions.

Finally, actively monitor the plan’s effectiveness and adjust based on employee feedback and business performance. Establishing a feedback loop encourages continuous improvement and helps the bonus plan evolve in line with both company objectives and employee expectations.

How much should I pay for discretionary bonuses?

When deciding how much to pay for discretionary bonuses consider company performance, individual contribution, market rates and overall budget. You need to get the balance right so employees are fairly rewarded and in line with the business’s finances.

How often should discretionary bonuses be paid?

Discretionary bonuses can be paid annually, quarterly or ad-hoc depending on the company’s policy and financial situation. Regular reviews and updates will keep the bonus scheme relevant.

How can I avoid favoritism when paying discretionary bonuses?

Define the criteria for bonuses and be transparent in the decision making process. Document the reasons for each bonus and have multiple decision makers.

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