Discretionary Bonus

A discretionary bonus is a sort of additional remuneration that an employer decides to give to an employee without the employee’s knowledge or consent. The employer may or may not have a stated justification for giving an employee a discretionary bonus. The employee’s discretionary bonus is not reliant on reaching specific objectives or goals. There is also no mention of a precise financial amount or date for the employee to receive the bonus.

Types of discretionary bonuses

1. Referral bonus:  Referral bonuses are frequently offered to current employees in exchange for introducing new staff. A referral bonus is optional if the following criteria are met:

• The employee joins the referral program of his or her own volition.
• The procedure of hiring new staff does not take up a lot of time for employees.
• During their free time, the employee solicits potential employees from friends, relatives, neighbours, and acquaintances.

2. Retention bonus: Employers may give retention bonuses to employees in extremely specific circumstances (such as a merger or acquisition) or when the company or department has a key project to accomplish. When an employee’s future job is uncertain, employers pay these bonuses to create consistency. A retention incentive incentivizes employees to stay with the company until a certain date to continue contributing to organizational goals.
3. Holiday bonus: For Christmas, New Year’s Eve, annual events, and other special occasions, employers may offer holiday bonuses to their staff. The real bonus could be cash or a gift, depending on the employer’s customary practices and preferences.

A holiday bonus, on the other hand, can be regarded as non-discretionary and contractual if it becomes a standard and expected practice. 

How to build a Discretionary bonus plan?

Employers should keep their bonus structure and process consistent, especially if they’ve already defined and established how they’ll compute and payout discretionary incentives. Calculating discretionary bonuses and overtime pay should be as straightforward as feasible.

An employer’s discretionary bonus scheme should include the following:

1. Simple: Maintain as clear and straightforward a bonus strategy as possible. Employees should know why they are earning discretionary bonuses, and managers should know when and how to utilize them.
2. Equitable: All employees should receive an equal share of the discretionary bonus. Every employee in every department should be eligible for a bonus, with each incentive amount being fair and balanced.
3. Timely: Bonuses must be paid out during the pay period in which they were given. Bonuses should not be arranged or awarded on specific dates that employees are aware of, otherwise, they will be considered non-discretionary. As needed, adjust the bonus frequency.
4. Relevant: Bonuses must be meaningful to both employees and management. The bonus should have meaning for the employee to give them a better sense of fulfillment.This increases the employee’s sense of having earned or deserving the bonus.
5. Material: A bonus should be significant enough that the employee understands its worth. A tiny financial incentive or a cheap gift may upset the employee, diminishing their drive and appreciation for the extra.

How to calculate discretionary bonuses?

Based on the amount of cash available, employers can set a predetermined amount for a discretionary incentive. They can also utilize numerous formulas to calculate discretionary bonuses, such as:

1. Percentage of sales: Divide the employee’s total sales figures by a fixed amount.
2. Bonus per sale: Divide the fixed bonus amount by the number of sales made by the employee.
3. Divided designated sum: set a total bonus amount and divide it by the number of employees.
4.  The total number of hours worked: To calculate an hourly rate, add each employee’s total number of hours worked, divide the entire bonus by the total number of hours, and then multiply this rate by each employee’s total number of hours worked.