What is a discretionary bonus?

What is a discretionary bonus? Definition and meaning

A discretionary bonus is paid for services performed. To be considered discretionary, the bonus cannot be given because of a promise that was made in advance, a contract, or another agreement. It usually occurs on a one-time basis and is not tied to specific performance metrics.

More about discretionary bonus criteria

To be classified as a discretionary bonus, a bonus must meet the following requirements:

• It’s based on the employer’s discretion.
• It’s unplanned and has no predetermined criteria.
• It’s not part of a verbal agreement or employee contract.
• It’s not expected by an employee or received on a regular basis.
• It doesn’t count toward an employee’s regular compensation plan or overtime calculations under the Fair Labor Standards Act (FLSA).

Employers who choose to offer discretionary bonuses should budget for them in advance. They may designate a pool of money that allows them to award employees with these unexpected awards throughout the year.

What are examples of discretionary bonuses?

An employer can choose to offer a discretionary bonus to its employees for a number of reasons. Some of the most common types of discretionary bonuses include:

• Retention bonuses: A company may give out a retention bonus to motivate an employee to continue working at the company after a merger or acquisition or following an important project.
• Holiday or year-end bonuses: A holiday or year-end bonus is considered discretionary if it’s unexpected and awarded in the form of cash or a gift.
• Spontaneous gestures: If an employer provides gift cards, additional paid time off, or other types of spontaneous awards, these will fall into the discretionary bonus category.
• Spot bonuses: A spot bonus is randomly awarded to recognize an employee’s hard work on a certain task, project, or initiative.
• Challenge-related bonuses: If an employee overcomes a stressful day or unforeseen obstacle, a spontaneous bonus may be appropriate.

Why do some employers use discretionary bonuses?

Some employers pay discretionary bonuses to recognize high-performing or loyal employees. This type of compensation is often used to:

• Increase morale: The surprise element of a discretionary bonus can lead to positive feelings about a company and in turn, boost an employee’s morale.
• Improve retention: A discretionary bonus may motivate an employee to continue working at a company and in turn, reduce turnover.
• Encourage exceptional performance: Once an employee receives a discretionary bonus, they may continue to work hard and perform well for a company.
• Enhance culture: When an employer offers discretionary bonuses, they help foster a positive culture that appreciates employees and their dedication to an organization.

Discretionary bonuses are also flexible in that employers are not obligated to reward them at certain times. They can choose to offer them during unexpected situations in which they make sense for both parties.