A bonus is extra pay that a company agrees, orally or in writing, to provide to an employee. A discretionary bonus can be for specific or unexpected situations and are not part of the employee’s monthly contractual amount. This type of bonus is typically awarded for exceptional performance, contribution or accomplishment that goes far beyond the employee’s scope of duties. Let us understand more about discretionary bonus in detail including its types, examples and calculation.
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How does a Discretionary Bonus work?
A discretionary bonus is a compensation given to an employee based entirely on his or her logical discretion. In addition to there being no expectation of paying these bonuses, there are no set guidelines regarding how to become eligible for one.
For a bonus to be considered discretionary, it should be awarded at the sole discretion of the employer rather than expected to be received by the employees. A discretionary bonus is a form of variable pay; the amount, requirements, timing and announcement of the bonus should not be disclosed in advance, as this may appear to be a motivator or incentive implying that meeting certain levels would guarantee a bonus or reward. The employer determines after the fact that there is a reason for awarding a bonus, such as reaching company and financial goals, or chooses to reward an individual employee after exceptional performance.
Difference between Discretionary and Non- Discretionary Bonus
Unlike a discretionary bonus, the non-discretionary bonus does have specific criteria that the employee is required to meet to qualify for the bonus. The employer predetermines the criteria and the employees expect to earn the bonus only after they meet the said criteria. An example of this is an incentive pay plan which provides bonuses for employees who exceed productivity or performance goals. Here are the other differences between discretionary and non-discretionary bonuses.
|DISCRETIONARY BONUS||NON-DISCRETIONARY BONUS|
|Discretionary bonuses are paid at the discretion of the employer||Non-discretionary bonuses are based on defined performance criteria|
|Bonus entitlement is not written into the employees’s contracts||Bonus entitlement might be written into the employment contract|
|The standard of performance required to trigger a bonus, and the amount of bonus paid, are flexible||Employees know how well they need to perform to receive their bonus|
|For discretionary bonuses to create an incentive, employees must trust they will receive a bonus for good performance||You might be legally obliged to receive bonuses when criteria are met, even if other factors cause a strain on finances|
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Types of Discretionary Bonuses
Employers may offer a discretionary bonus for many reasons. Some of the reasons are listed below:
- The employee overcomes a challenging or difficult situation
- The employee goes beyond his or her usual duties
- The employee demonstrates exceptional performance that is not awarded under other specified criteria
- In case the employee refers a new employee
- The employer recognizes the employee’s work during holidays
1. Referral Bonuses
Employers sometimes award referral bonuses to current employees for referring new employees. A referral bonus is considered discretionary, if the following criteria is met:
2. Retention Bonuses
Employers sometimes offer retention bonuses to employees when there are very specific circumstances, or when the company needs to complete an important project. Employers award therae bonuses to provide continuity when there is a lack of certainty with respect to an employee’s ongoing employment. A retention bonus encourages the employee to remain with the company until a certain date to ensure that they can continue their involvement in organizational priorities.
3. Holiday Bonuses
Employers may award holiday bonuses to employees on certain occasions. The actual bonus could be cash or a gift, depending on the employer’s usual practices and preferences.
However, if a holiday bonus becomes a standard and expected practice, it can be viewed as non-discretionary and become contractual. A holiday bonus becomes non-discretionary if the giving of the bonus meets these criteria:
Calculating Discretionary Bonuses
Employers can give a set amount for a discretionary bonus based on how much funding is available. They can also calculate discretionary bonuses using different formulas:
Percentage of sales: Multiply the employee’s total sales figures by a specific amount.
Bonus per sale: Multiply the specific bonus amount by the number of sales the employee makes.
Designated sum divided: Set a total amount for bonuses, and divide it by the number of employees.
Number of hours worked: Add each employee’s total hours, divide the total bonus by the total number of hours to determine an hourly rate and multiply this rate by each employee’s number of hours worked.
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Frequently Asked Questions (FAQs)
Are discretionary bonuses included in overtime calculations?
Whether your bonus is included in an overtime calculation depends on the type of bonus you were awarded. If your bonus was discretionary— was not expected and not given on a regular basis—it isn’t included in your overtime pay calculations.
Are annual bonuses discretionary?
Annual, or year-end, bonuses are non-discretionary if the employee expects to receive them. In order for a year-end bonus to be discretionary, the employer cannot have created any expectation by employees that a bonus will be paid if certain goals are set. However, if the employer gives an annual bonus each year, the non-discretionary bonus pay must be factored into non-exempt employees’ overtime pay for the period of time that was covered by the bonus.
What are the common examples of non-discretionary bonuses?
Some common examples of non-discretionary bonuses include hiring bonuses, incentive pay plan, attendance bonus, bonuses for quality or accuracy of work etc.
Why did I get a discretionary bonus?
Discretionary bonuses are often used to reward exceptional performance, contribution, or accomplishment that goes above and beyond the employee’s usual duties. Many companies choose to give discretionary bonuses once or twice per year, but are under no obligation to do so by law.