What is a nondiscretionary bonus?

Nondiscretionary bonus definition and meaning

A nondiscretionary bonus is a type of additional compensation that an employer may decide to offer an employee and usually tied to a specific expectation, metric, or benchmark.

Nondiscretionary bonus criteria

For example, if an employee meets a certain sales quote, an employer may reward them with a nondiscretionary bonus. Here are the main components of a nondiscretionary bonus:

• It must correlate to a clear, measurable metric.
• Employees need to meet that preestablished metric to receive the bonus.
• Employees are aware of what they need to do to earn the bonus.
• Employees expect the bonus after they meet the metric.
• The employer doesn’t have discretion regarding the timing of the payment or amount.
• It may impact a non-exempt employee’s overtime compensation.

Why would an employer offer a nondiscretionary bonus?

By offering non discretionary bonuses, employers may:

• Promote high performance: When employees are aware they have the opportunity to receive nondiscretionary bonuses, they may be more motivated to meet certain sales figures or other company goals.
• Encourage loyalty: Those who earn nondiscretionary bonuses are often loyal to the company, improving retention and reducing turnover.
• Show appreciation: A nondiscretionary bonus is an excellent way to recognize hard working employees who go the extra mile.
• Recruit top talent: With a nondiscretionary bonus program that can help increase total compensation, employers may find it easier to attract highly qualified employees.

How does a nondiscretionary bonus affect overtime pay?

Nondiscretionary bonuses are vital to calculating overtime pay for nonexempt employees. Under the Fair Labor Standards Act (FLSA), these bonuses must be included into the regular pay rate, which is used to calculate overtime. If an employee receives a non-discretionary bonus, their hourly pay rate and overtime pay rate increases.

Let’s say a non-exempt employee earns $800 for every 40-hour workweek. In this case, their regular pay rate is $20 per hour. However, if they earn a $100 nondiscretionary bonus for attendance, the employee will have earned $900 for a 40-hour workweek. In that week, their regular pay rate becomes $22.50 per hour. As a result, the employer must pay their overtime for that workweek at a time and half rate of $33.75 per hour.

It’s important for employers who offer nondiscretionary bonuses to be careful when calculating overtime pay so that they comply with labor regulations and avoid potential penalties.

What is an example of a nondiscretionary bonus?

There are a number of nondiscretionary bonuses employers may offer, including:

• Attendance bonuses: Some employers provide attendance bonuses to employees who don’t miss work during a given time period.
• Performance-based bonuses: Performance-based bonuses are often awarded after employees meet predetermined metrics or goals.
• Commission bonuses: Commissions may be granted to employees who meet or exceed certain sales quotas.
• Referral bonuses: If a current employee recruits a new employee and they successfully remain with the company for a set period of time, an employer may thank them with a referral bonus.
• Safety bonuses: Safety bonuses might make sense for employers who prioritize workplace safety and want to award employees who follow safety guidelines and help cultivate a safe environment.
• Signing bonuses: Signing bonuses are designed to incentivize individuals to accept job offers.