Career Development

What Is a Discretionary Bonus?

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A discretionary bonus is one of the types of bonuses that might be awarded by an employer. Some employers award discretionary bonuses to recognize an employee’s performance, as a thank you for referrals or to avoid the risk of having to recalculate any overtime compensation at the end of the year. In this article, you can learn what a discretionary bonus is and how some employers decide to calculate and award discretionary bonuses.

What is a discretionary bonus?

A discretionary bonus is extra compensation that a company gives to an employee to reward exceptional performance, an accomplishment or contribution that goes above and beyond regular duties for the job. To be awarded as a discretionary bonus, the payment must be made at the discretion of the employer at or near the end of a bonus period and the employee cannot expect to receive the bonus regularly. While many companies choose to award discretionary bonuses once or twice per year, they’re not obligated to do so.

When is a discretionary bonus awarded?

Because a discretionary bonus is considered compensation that involves extra pay and because it is awarded at the sole discretion of the employer—without the employee knowing in advance—it isn’t possible for employees to predict their own discretionary bonuses. This additional compensation is periodically awarded for specific or unexpected reasons and are not part of the employee’s contract. While many companies provide discretionary bonuses once or twice per year, they aren’t under any obligation to do so unless the employees are promised the bonus in advance.

Common methods for calculating a bonus

Here are some of the different methods that an employer might use to calculate a bonus: 

Percentage of sales

To calculate the bonus this way, the employer would multiply the employee’s total sales by the designated amount.

Bonus per sale

For a bonus per sale, the employer would multiply the designated bonus amount by the number of sales that the employee made.

Designated sum divided

To calculate this bonus, the employer would designate a total amount for bonuses and then divide it by the number of employees.

Number of hours worked

To calculate a bonus based on hours worked, you add the total number of hours that each employee worked, divide the total bonus by the total number of hours to determine the amount per hour and then multiply the per hour bonus amount by the number of hours each employee worked

Popular reasons for awarding a discretionary bonus

Here are some of the most popular reasons that an employer may choose to award a discretionary bonus:

  • Reaching the company or financial goals
  • Achieving exceptional performance
  • Accomplishments that go beyond the usual realm of duties
  • Recognizing an employee’s hard work during the holidays
  • Referring a new employee

In order for a bonus to be discretionary, it is given at the sole discretion of the employer and the requirements for receiving it shouldn’t be disclosed in advance.

Frequently asked questions about discretionary bonuses

Here are a few of the most frequently asked questions about discretionary bonuses:

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.

What are non-discretionary bonuses?

Non-discretionary bonuses are those that the employee expects. They are usually given based on standards the employee has met to receive the payment and the payment is made routinely on a set schedule. Common reasons for awarding non-discretionary bonuses include meeting production goals or hitting profit numbers. 

Non-discretionary bonuses are included in the regular rate of pay and overtime calculations. This means that a non-discretionary bonus would raise the regular rate of pay for employees who receive overtime compensation. If a non-exempt employee receives a non-discretionary bonus during a pay period and their hourly rate is raised, they must be paid time-and-a-half based upon the higher pay rate. If the employee is unexpectedly awarded the bonus, however, it doesn’t affect their regular pay rate and overtime pay doesn’t need to be recalculated.

Are annual bonuses discretionary?

Annual, or year-end, bonuses are non-discretionary is 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. 

This applies even if the bonus is paid long after the employee works the overtime period, which may occur in the case of an annual bonus. Similarly, if an employer announces in January that they will be paying a bonus in June if certain goals are met, they have abandoned discretion and the bonus—even though it won’t be awarded for six months—is non-discretionary.

Are referral bonuses discretionary?

Referral bonuses are incentives paid to employees for recruiting new employees. 

Examples of discretionary activity for a referral bonus:

  • The employee has participated in the program voluntarily
  • The employee’s recruitment efforts don’t require significant amounts of the employee’s time
  • The activity only occurs after-hours among friends, family, neighbors and acquaintances

Why do employers pay bonuses?

Many companies use bonuses as a way of expressing appreciation to their teams for achieving goals. It can also be used to improve productivity, motivation or morale. By tying bonuses to performance, organizations can incentivize employees to reach their personal goals, which in turn can help the company reach its own. 

Because employees can come to rely on bonuses as part of their salary, it can be in the best interest of the company to award discretionary bonuses. This can save the company time recalculating overtime pay if bonuses are given to non-exempt employees. It also can eliminate the risk that employees will rely on bonuses as part of their compensation.

Common types of bonuses

Here are some of the most common types of bonuses that companies give their employees:

Contracted

Many executives have in their contracts that they will receive bonuses, although they are often contingent on the company achieving specific revenue targets. The employer may also base the bonus on other methods as well, such as employee retention, sales or growth goals.

Performance

Employers often reward based on different types of performance goals. For example, they may give bonuses for meeting or exceeding personal goals. They may also award bonuses for helping the company exceed its financial goals. Some companies will award larger bonuses to employees who have higher salaries. For example, if an employee makes $50,000 they may be eligible for a five percent bonus for helping the company achieve its financial goals, while an employee who makes $100,000 may be compensated with a 10% bonus.

Sales commissions

Sales commissions are also referred to as bonuses, although, unlike other bonuses, they are directly tied to your sales performance. Some companies place a cap on the amount of compensation sales representatives can receive in a bonus.

Discretionary

This type of bonus is one that employees don’t expect and that the company isn’t obligated to reward employees with.