What is a Discretionary Bonus: Our Guide to Discretionary Bonuses

Depending on your line of work, you may be eligible for additional compensation in the form of a discretionary bonus or a nondiscretionary bonus. 

If you’re on the hunt for a new job, you may be looking for a job with a decent base salary plus a lucrative bonus structure. While many companies provide monetary (cash) bonuses, a bonus can take other forms such as paid time off (PTO), or restricted stock units (RSUs). If you’re confused about bonuses, how they work, and the different types of bonuses offered, we’ve got you covered!

Bonuses vary from firm to firm and from country to country in alignment with different criteria. Because there are many types of bonuses, they all work differently. However, many companies have predetermined formulas to ensure fair pay relative to performance.

If your contract outlines bonuses in addition to your salary, and how bonuses are determined, you’re likely up for a nondiscretionary bonus. This makes it more likely that you will be able to determine if you’ll get your bonuses at the end of the year, the timeline of when you can expect your bonus, and how much you’re eligible for (the bonus amount). Discretionary bonuses are a whole different ballgame, because they are determined at the sole discretion of your employer.

What is a Discretionary Bonus?

The Department of Labor (DoL) defines a bonus as “a payment made in addition to the employee’s regular earnings.” 

A discretionary bonus is given to non-exempt employees at the sole discretion of the employer, and is not related to any criteria or goals set.

The DoL continues to explain that discretionary bonuses are excludable from the regular rate of pay under the Fair Labor Standards Act (FLSA).  A bonus is discretionary only if all the statutory requirements are met:

• The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
• The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.

Discretionary vs. Nondiscretionary Bonus

Unlike a discretionary bonus, a nondiscretionary bonus is a pay increase offered by an employer if employees meet certain requirements or specific circumstances that are outlined ahead of time. These are usually standing offers that act as a reward or incentive for employees to drive better performance and accuracy of work in the office. 

Some of the most common nondiscretionary bonuses are bonuses that are written into employment contracts. These bonuses often get awarded at the end of the year.

When employers offer nondiscretionary bonuses, they designate specific conditions to be met and a set amount or range to be paid. Examples of nondiscretionary bonuses include hiring bonuses or annual bonuses that are outlined in an employee’s contract upon getting hired.

The Breakdown:

We’re breaking down the main differences between discretionary and nondiscretionary bonuses.

Discretionary Bonuses:

• Given at the sole discretion of the employer
• No set the expectation of a bonus based on outlined goals
• Unknown amount and timing of the bonus
• Used to recognize exceptional performance
• Usually a one-time arrangement

Nondiscretionary Bonuses:

• Given based on employee and company performance
• Set expectations based on outlined goals or requirements
• Outlined amount and timeframe given in advance
• Used to incentivize better performance in the workplace
• Usually an annual bonus structure

Types of Nondiscretionary Bonuses

The DoL goes on to explain that nondiscretionary bonuses are included in the regular rate of pay, unless they qualify as excludable under another statutory provision. 

Examples of nondiscretionary bonuses that must be included in the regular rate include:

• Bonuses based on a predetermined formula, such as individual or group production bonuses
• Bonuses for quality and accuracy of work
• Bonuses announced to employees to induce them to work more efficiently
• Attendance bonuses
• Safety bonuses (i.e., number of days without safety incidents)

Nondiscretionary bonuses help to increase total compensation when you’re negotiating your salary. Additionally, these bonuses allow employees to plan their goals and budget accordingly based on target bonus estimates. 

On the flip side, an employee exceeding all goals might feel that the formulaic nondiscretionary bonus structure doesn’t adequately recognize their hard work.

Types of Discretionary Bonuses

Employers may award a discretionary bonus for a variety of reasons, including the following:

• The employee overcomes a challenging or difficult situation
• The employee demonstrates exceptional performance that is not awarded under other specified criteria
• The employee goes beyond their usual duties
• The employer selects an employee of the month
• The employer recognizes the employee’s work during the holidays
• The employee refers a new employee

Discretionary bonuses can be awesome because they can help to highlight employee appreciation, however because discretionary bonuses are unexpected, employees can’t accurately budget this extra pay into their annual expenses. This can be stressful if you’re someone who likes to plan ahead and budget accordingly.

Referral Bonuses

A referral bonus is awarded when an internal employee refers a candidate that gets hired onto the team. 

This kind of bonus is considered discretionary in line with the following criteria:

• The referral program is voluntary
• The recruitment of new employees is not part of the employee’s job
• Referrals don’t take up much of an employee’s time

Retention Bonuses

A retention bonus may happen when a company is involved with a merger or acquisition in order to entice employees to stay on with the company, regardless of organizational changes. In these specific circumstances, retention bonuses 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.

Holiday Bonuses

A holiday bonus, otherwise known as a year-end bonus is often awarded during the winter holiday season (i.e. Christmas, Hanukkah, new year, etc.). This kind of bonus may be awarded during other annual events or occasions such as an employee having an anniversary with the company.

It is important to note that if a holiday bonus becomes a standard and expected practice, it can be viewed as nondiscretionary and become contractual.

How Employers Calculate Discretionary Bonuses

Depending on how much funding is available in the year, quarter, or given period, an employer may award current employees with discretionary bonuses using a variety of different formulas. Some employers may take into account overtime pay calculations, while others may focus on the total number of hours worked if the employee is salaried.

Here are some examples of how employers might calculate a discretionary bonus:

• 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

How to Calculate Your Potential Bonus Pay

If you’re looking to calculate a bonus structure, these bonus calculators from Eddy can help create salary-based and commission-based figures.  

Pro Tip: If you’re an employee negotiating salary and compensation for a new role, discuss bonus structures so that you understand how you can earn your bonus.

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This article was written by The Salary Project writer, Michele Lando.