What is Discretionary Bonus: Everything Explained

Who doesn’t wish to earn a bonus or surplus over their income?

To comply with this desire and encourage the productivity of employees, many companies offer a discretionary bonus.

Employers offer this bonus on or above the final salary. Keep reading to learn about this lucrative bonus and its calculation.

What Is Discretionary Bonus?

A discretionary bonus is a form of compensation offered to employees by a company against hard work and performance.

This is a form of acknowledgement of an employee's contribution to the company’s profits. This contribution of an employee goes beyond the regular duties.

However, an employer arrives at this decision of bonus payment after assessing an employee’s performance. Individuals receive this amount once at the end of a bonus period, unlike their usual monthly salary structure.

However, the number of bonuses can differ from company to company. Many firms award their employees multiple times as a form of encouragement.

Let’s look at an example to understand the discretionary bonus definition better.

For instance, a company has reached a financial target or has earned profits. They decide to give the employees additional funds as a surprise bonus.

This bonus won’t be mentioned in the salary agreement or other contracts. However, individuals should know that a company isn’t obligated to pay this bonus.

Since this bonus does not come with any terms or criteria, it makes every employee eligible to gain a discretionary bonus.

Now, let’s understand what makes a discretionary bonus different from a non-discretionary bonus.

How Is Discretionary Bonus Policy Different from Non-Discretionary Bonus?

To understand the differences, individuals need to be clear about the factors related to non-discretionary and annual discretionary bonuses.

The following table explains the difference in a distinctive way.

Factors	Discretionary Bonus	Non-Discretionary Bonus
Criteria	An employer decides this bonus on specific parameters. It is more like a surprise.	This bonus form is based on performance assessment or specified criteria.
Bonus Entitlement	Not written in an employee’s contract	Written in an employee’s contract
Performance	Here, there are no specific standards or qualifications to receive a bonus. The terms are flexible.	Since the employees know the terms to gain the bonus, they can work accordingly.
Reason to Receive Bonus	To receive a discretionary bonus, the employee has to trust the employer. There are no fixed assessment points on an employer’s end.	Individuals can claim this bonus if they meet the given criteria. If the contract defines this bonus, the employees are obligated to receive compensation.

Now that you know how a discretionary bonus differs from a non-discretionary one, let’s check the types of discretionary bonuses an employee can expect to receive.

What Are Types of Discretionary Bonus?

Following are the common types of discretionary bonuses a qualified employee can receive.

1. Retention Bonus

An employee can receive a retention bonus from an employer to appreciate staying with the company through tough times. Employers offer this under specific circumstances, such as the employee is needed to complete a crucial project.

An employer can also offer this bonus to ensure maximum productivity.

This ensures that an individual will stay with the company until a specific date and complete the priorities.

2. Referral Bonus

Employees sometimes receive a referral bonus when suggesting capable employees. Usually, they can receive against these criteria -

An individual voluntarily suggests an excellent employee or friend.
Staffing of the fresh employee doesn’t consume an employer’s time.

3. Holiday Bonus

Many organisations offer festival or holiday bonuses to employees. This is seasonal. i.e., employers provide it during a special occasion. This can be a gift or cash, depending on an employer's decision.

However, individuals should know that if holiday bonuses will fall under the non-discretionary category when offered yearly.

Once the types of this bonus are clear, have a look at the formulae for discretionary bonus calculation. This will help an employee understand the surplus they can receive.

What Are the Ways to Calculate Discretionary Bonus?

An employer may scrutinise their financial strength and decide the amount against discretionary bonuses. They apply the formulas mentioned below to calculate the possible bonuses to offer.

Sales Percentage- They consider an employee’s total sales figure divided by a specific amount.
Bonus Per Sale - An employer may multiply the number of sales made by an employee by a certain bonus amount.
Designated Sum- They divide the total number of employees against the bonus amount.
Working Hours- Here, the total number of working hours is divided by total bonuses to find an hourly rate. Employers then multiply this amount by the total working hours of an employee.

These are some valuable inputs on the discretionary bonus and its calculation. Individuals employed in a firm should work with enthusiasm and attentiveness to increase their chances of gaining the said bonus.

Frequently Asked Questions

✓ Does an employee need to pay tax against a discretionary bonus?

Yes, most bonuses linked with performance, ratings, incentives, etc., are taxable.

✓ Does the incentive pay plan fall under non-discretionary bonuses?

Yes, an incentive pay plan falls under non-discretionary bonuses.