Discretionary bonus: Overview, definition, and example
What is a discretionary bonus?
A discretionary bonus is a type of financial reward given to employees by an employer, based on the employer’s discretion and judgment. Unlike a guaranteed bonus, which is outlined in an employee’s contract, a discretionary bonus is not guaranteed and can be given at the employer's discretion for various reasons, such as exceptional performance, company profits, or special contributions. The amount and timing of a discretionary bonus are determined by the employer and are usually given as a surprise or in recognition of specific achievements.
For example, a business owner might give a discretionary bonus at the end of the year to employees who have worked hard, contributed to business growth, or helped achieve important goals.
Why is a discretionary bonus important?
A discretionary bonus is important because it serves as an incentive to motivate employees, reward outstanding performance, and boost morale. It provides employers with flexibility, as they can decide when and how much to reward employees based on the business's financial health, employee contributions, or other factors. For businesses, discretionary bonuses can also help retain top talent and encourage employees to go above and beyond in their work.
For SMBs, offering discretionary bonuses can be a cost-effective way to reward employees and foster a positive work environment, even if the company may not have the budget for regular salary increases.
Understanding discretionary bonus through an example
Imagine your business has a strong year, exceeding revenue targets. As a result, you decide to reward your employees with a discretionary bonus. You give a bonus to employees who have significantly contributed to the success of the company, based on their hard work, loyalty, and results. These bonuses are not set in the contract and are determined solely based on your decision to acknowledge and reward their efforts.
In another example, an employee who goes above and beyond by taking on additional responsibilities or completing a major project successfully may be rewarded with a discretionary bonus as a way to show appreciation for their exceptional performance.
An example of a discretionary bonus clause
Here’s how a discretionary bonus might be referenced in an employee handbook or contract:
“The Company may, at its discretion, award a bonus to employees based on the company’s performance, individual contributions, or other factors deemed appropriate by management. Bonuses are not guaranteed and are subject to the employer’s discretion.”
Conclusion
A discretionary bonus is a flexible and effective way for businesses to reward employees for exceptional performance, contributions, or achievements. Unlike guaranteed bonuses, which are outlined in contracts, discretionary bonuses are determined at the employer’s discretion and are typically given when the company or individual employees exceed expectations. For SMBs, offering discretionary bonuses can help build morale, improve performance, and retain top talent, while also allowing for financial flexibility.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.