Discretionary Vs Non-Discretionary Bonus

By Amanda Covaleski
Aug. 28, 2022
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Are you a business owner who’s ready to give out bonuses to hard-working employees? If so, you’ve probably run into the question of whether to hand out discretionary or non-discretionary bonuses. So which type of bonus should your organization reward employees with?

Choosing the right type of bonus to award will help you reward your employees for their hard work while saving you money and preventing any uncomfortable conversations about overtime pay.

Key Takeaways:

  • Discretionary bonuses are awarded at the discretion of the employer.

  • Non-discretionary bonuses are awarded based on qualifications that the employee is aware of.

  • Under the Fair Labor Standards Act (FLSA), non-discretionary bonuses given to non-exempt employees can affect how overtime pay is calculated.

  • Examples of non-discretionary bonuses include signing bonuses, performance bonuses, and retention bonuses.

  • Using specifics and quantifiable results helps simplify the bonus process.

Discretionary Vs Non-Discretionary Bonus

What Is a Discretionary Bonus?

Discretionary bonuses are what you think of when you usually think of a bonus. These rewards are exactly how they sound — completely up to the discretion of the employer.

Typically, employees don’t expect these bonuses and don’t know the requirements expected of them to earn them.

There’s usually no public set goal, performance expectations, or amount attached to discretionary bonuses. If your administration, HR, or managing team has a system set up to decide when bonuses are awarded, that’s usually fine.

There shouldn’t be any external knowledge of your bonus policy. That means that employees shouldn’t know what they need to do in order to earn a bonus, when bonuses get awarded or how much money they could get in the form of a bonus.

With discretionary bonuses, managers are the ones who decide who earns a bonus and what their amount should be. There shouldn’t be any contract or informal understanding about the work needed in order to earn a bonus.

In other words, discretionary bonuses are the most common type of bonus. An employee works hard and can get extra compensation to reward them for their hard work.

What Is A Non-Discretionary Bonus?

Non-discretionary bonuses are the opposite of discretionary bonuses, so they are agreed upon by the managers and employees ahead of time.

Unlike discretionary bonuses, non-discretionary bonuses have known qualifications, and if an employee meets them, they can expect to get a bonus.

Since the main difference between the two bonuses is whether the employees know the criteria to earn them or not, it’s easy to think of non-discretionary bonuses as incentive bonuses.

When the employees know what they need to do in order to earn more money, they are incentivized to meet those goals. If they know that they can receive a discretionary bonus instead, there would be no specific goal for them to reach in order for them to earn a bonus.

What Is The Difference Between Discretionary and Non-discretionary Bonuses?

The differences between a discretionary and non discretionary bonus are:

  • Knowledge. With a discretionary bonus, only the employer knows the mechanics of the bonus. With a non-discretionary bonus, the employee must know ahead of time what is available.

  • Qualifications. Non-discretionary bonuses usually come with pre-determined and agreed upon qualifications that the employee must reach to receive the bonus. With a discretioanry bonus, this is not necessarily the case.

  • Schedule. Many-non discretionary bonuses rely on a schedule, while discretionary bonuses can be at random.

Knowing the difference between these two types of bonuses can help you make an informed decision about how to reward your employees for their hard work. It’s important to note that some companies mix the two bonuses to compensate all of their employees better.

You can award a few non-discretionary bonuses for career milestones while keeping the majority of your bonuses discretionary. It’s up to you and what you think is best for your company.

Why Discretionary and Non-Discretionary Bonus Matters

Knowing the difference between discretionary and nondiscretionary bonuses and choosing the right type of bonus for your company is important. It can change the way you encourage your employees to be productive and incentivize them to meet company goals.

  • FLSA. Choosing the type of bonus you award to your employees can also have an impact on some legal parts of your business and how you adhere to the Fair Labor Standards Act or FLSA. Since the FLSA establishes two types of employees (exempt and non-exempt) and how they’re paid for their time, the type of bonus you award can affect how you categorize your employees.

    • Exempt employees are salaried and expected to complete all of their work without overtime hours. This means that they can’t request overtime pay and the salary that they agreed to is their final salary for a pay period.

    • Non-exempt employees, on the other hand, can receive overtime pay, or 1.5 times their hourly rate. They can charge you 1.5 their normal rate for any overtime hours worked or any hours worked over the normal 40 hours of the workweek. Non-exempt employees are typically hourly workers or contract workers and not full-time salaried employees.

    Because of these two separate types of employees, you can run into some issues when it comes to giving non-discretionary bonuses to non-exempt employees. Since non-exempt employees can earn 1.5 times their hourly rate, the non-discretionary bonus could cause a change in their salaries.

    Non-discretionary bonuses mean that employees know exactly what they need to do to earn them, so when they earn the bonus, the extra money could then be counted as their regular salary under FLSA.

    So, if that same employee then requires overtime pay, you could be paying them 1.5 times their normal salary plus the bonus they were awarded. This issue isn’t present with discretionary bonuses, so going that route might save you some headaches.

  • State laws. Each state has different laws when it comes to payroll, so you want to make sure that you’re compliant and giving all of your employees what they’re owed, no matter what types of employees you have or what kind of bonus you choose to award.

  • Motivation. Choosing between discretionary and non-discretionary bonuses can also impact how you motivate your employees and how you meet company goals.

    For example, non-discretionary bonuses are great if you need your sales team to meet certain sales goals. They know what they need to sell in order to earn a bonus, so you can motivate them to meet that goal and get that bonus.

    Discretionary bonuses, on the other hand, are good for praising good work from your employees. They are a chance to reward a select few employees for great work and recognize them for everything that they’ve done.

    These types of bonuses can also have a motivating effect since your employees know what they need to do to impress their managers, coworkers, or executive team to earn discretionary bonuses.

    Knowing that there’s a chance at a bonus could make your employees exceed your expectations.

Examples of Non-Discretionary Bonuses

While non-discretionary bonuses can be hard to wrap your head around, they’re actually pretty common. Here are a few common bonuses that can be considered non-discretionary:

  • Hiring bonus. Also known as a signing bonus, these are awarded to new employees when they join your company. They’re especially helpful for people who are relocating, taking a pay cut, or bring more experience to the table than the job requires.

  • Attendance bonus. If an employee has an impeccable attendance record, they can be awarded an attendance bonus. You can set certain parameters like they’re on-time to work and present in the office 90% of working days, or however you determine it’s best to award the bonus.

  • Accuracy bonus. Sometimes you want to reward an employee who rarely makes mistakes and always turns in impeccable work. Accuracy bonuses let you do that and set the qualifications required to earn the bonus.

  • Performance bonus. If you need employees to deliver certain results, you can award performance bonuses. You can establish any goal or benchmark and reward employees who meet those goals with predetermined bonuses.

  • Retention bonus. Sometimes it can be hard to hold onto your best employees as they leave to start families or join other companies. One way to reward your employees for loyalty and keep them around is through retention bonuses.

    You can award bonuses at certain milestones (like giving out a bonus to an employee who has spent five or ten years at your company) or give out a little extra cash on their work anniversary to keep them around.

  • Profitability bonus. If your business had a great year and you want to share the wealth with your employees, profitability bonuses let you do just that. You can determine what percentage of your company’s profits get set aside for bonuses and then award that to employees accordingly.

  • Production bonus. Production bonuses are great for rewarding a team or department for doing good work. You can choose what the team or individual employee needs to do in order to earn the bonus based on things like quality and quantity of production.

Tips for Simplifying Bonuses

No matter what type of bonus you decide to award, here are a few tips for simplifying the process:

  • Communicate. Make sure your employees know what’s going on. Let them know the timelines of bonuses and when you expect to hand them out.

    If you’re using non-discretionary bonuses, make sure your employees know exactly what’s expected of them to earn the bonus. It will help make things run smoother and avoid any potential conflicts.

  • Spread out bonus periods. Often companies will award yearly bonuses or wait to give out a holiday bonus, but you can actually save time and money by using multiple bonus periods in a year.

    Offering different smaller bonuses saves you time from calculating yearly bonuses, and it can help you give smaller rewards more frequently instead of multiple large rewards once a year.

  • Use numbers. It can be tricky to award bonuses based on qualitative criteria, like the quality of work or employee enthusiasm. Using percentages to determine eligibility for bonuses is a great way to provide consistent bonuses to all employees who earned them.

    Think of calculating the total amount of money you pay all of your employees, then award bonuses based on what percentage of that total amount they earn.

    For example, if you give out $100,000 in salaries in a year and one of your employees earns $25,000 in a year, they would then be eligible for 25% of whatever amount you set aside for bonuses.

  • Take advantage of discretionary bonuses. One way to eliminate headaches and messing around with numbers is to only use discretionary bonuses. It can be easier just to decide who has done good work and award them.

    Just keep in mind that discretionary bonuses can be challenged if employees sense favoritism or unfairness in your bonuses, so try to keep things fair.

  • Mix bonuses. You can always use more than one type of bonus, and sometimes it works better that way.

    You can offer non-discretionary bonuses like signing bonuses for new employees or retention bonuses for loyal employees while also rewarding top performers with discretionary bonuses.

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Amanda Covaleski

Amanda is a writer with experience in various industries, including travel, real estate, and career advice. After taking on internships and entry-level jobs, she is familiar with the job search process and landing that crucial first job. Included in her experience is work at an employer/intern matching startup where she marketed an intern database to employers and supported college interns looking for work experience.

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