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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.
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.
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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. |
Following are the common types of discretionary bonuses a qualified employee can receive.
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.
Employees sometimes receive a referral bonus when suggesting capable employees. Usually, they can receive against these criteria -
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.
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.
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.
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