What is a Discretionary Bonus?
A discretionary bonus is a type of additional compensation that an employer decides to give to an employee on their own without the employee expecting it. The employer may or may not have a specific reason for awarding a discretionary bonus to an employee. The discretionary bonus is not contingent on the employee meeting specific expectations or goals. There is also no indication of a specific dollar amount or deadline before the employer awards the bonus to the employee.
What is the difference between a discretionary and non-discretionary bonus?
In contrast to a discretionary bonus, a non-discretionary bonus requires the employee to meet certain criteria. The employer establishes those criteria ahead of time and informs the employee of how they must meet those criteria in order to receive the bonus.
Non-discretionary bonuses include hiring bonuses and performance bonuses. Another type of non-discretionary bonus is an incentive pay plan. When an employee meets the established performance or productivity goals, they are eligible for this bonus.
Types of discretionary bonuses
1. Referral bonus
Employers will sometimes give referral bonuses to current employees in exchange for referring new employees. If the following criteria are met, a referral bonus is optional:
- The employee participates in the referral programme voluntarily.
- Employees' time is not consumed significantly by the process of recruiting new employees.
- The employee spends their off-hours soliciting potential employees, involving only friends, relatives, neighbours, and acquaintances.
2. Retention bonus
Employers may award retention bonuses to employees in very specific circumstances (such as a merger or acquisition) or when the company or department must complete a critical project. Employers award these bonuses to provide continuity when there is uncertainty about an employee's future employment. A retention bonus encourages employees to stay with the company until a specific date in order to continue their involvement in organisational priorities.
3. Holiday bonus
Employers may give employees holiday bonuses for Christmas, New Year's Eve, annual events, and other special occasions. Depending on the employer's usual practises and preferences, the actual bonus could be cash or a gift.
However, if a holiday bonus becomes a standard and expected practise, it can be considered non-discretionary and contractual. A holiday bonus becomes non-discretionary if the bonus is given in accordance with the following criteria:
- Is certain and obvious
- Is reasonable and equitable
- Has become a regular practise over time and is reasonably expected to continue by employees
- Employees have been subjected to it on a consistent basis.
How to build a Discretionary bonus plan
Employers should maintain consistency in the bonus structure and process, especially if they have previously explained and established how they will calculate and pay out discretionary bonuses. It's best to keep the process of calculating discretionary bonuses and overtime pay as simple as possible.
The following should be included in an employer's discretionary bonus plan:
Keep the bonus plan as simple and straightforward as possible. Employees should understand why they are receiving discretionary bonuses, and management should understand when and how to apply them.
The discretionary bonus should be equally distributed among all employees. Every employee in every department should be eligible for a bonus, with the amount of each bonus being fair and balanced.
Bonuses must be paid within the pay period in which they are awarded. Discretionary bonuses should not be scheduled or awarded on specific dates that employees are aware of; otherwise, they may be deemed non-discretionary. Change the frequency of bonuses as needed.
Bonuses must be meaningful to both management and employees. To provide the employee with a greater sense of fulfilment, the employer should attach meaning to the bonus. This gives the employee a better sense of earning or deserving the bonus.
A bonus should be substantial enough that the employee recognises its value. A cheap gift or a small financial bonus may offend the employee, lowering their motivation and appreciation for the bonus.
How to calculate discretionary bonus
Employers can set a fixed amount for a discretionary bonus based on the amount of funding available. They can also compute discretionary bonuses using various formulas, such as:
1. Percentage of sales:
Divide the employee's total sales figures by a certain amount.
2. Bonus per sale:
Divide the specific bonus amount by the number of sales made by the employee.
3. Divided designated sum:
Set a total bonus amount and divide it by the number of employees.
4. Total number of hours worked:
Add each employee's total number of hours, divide the total bonus by the total number of hours to determine an hourly rate, and multiply this rate by each employee's total number of hours worked.