What is a discretionary bonus?

A discretionary bonus is a type of bonus given at the discretion of the employer or supervisor. It is not guaranteed and may be based on factors like an employee’s performance, project completion, or the company’s overall financial performance.

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Unlike a performance-based bonus or retention bonus, a discretionary bonus is not a legal obligation, meaning the employer has no contractual duty to provide it.

This bonus is typically awarded on a case-by-case basis. It can act as an incentive for employees or a monetary reward for top performers or those who have met certain performance goals. SHRM’s total rewards framework recommends documenting discretionary bonus criteria to ensure consistent application and reduce discrimination risk, even though no fixed formula is required.

Examples include spot bonuses, project completion bonuses, or even gift cards as a reward. Since discretionary bonuses are flexible, they can help promote a culture of motivation and reward without committing to regular financial incentives.

What are the types of discretionary bonus?

Discretionary bonuses come in different forms, depending on what the company offers to its employees. Here are the most common types:

Performance based bonus: Employees are rewarded based on achieving or exceeding their performance goals. This type is usually awarded annually or quarterly to top performers or teams.
Profit sharing bonus: This financial incentive is tied to the company’s profits. Employees may receive a bonus based on a percentage of the company’s profits for a set period, encouraging alignment with company-wide goals.
Spot bonus: A one-time award given for exceptional performance, such as achieving a major milestone. It’s often a quick way to reward outstanding contributions and can include cash bonuses or even gift cards.
Employee referral bonus: Employees earn a bonus for referring a candidate who is successfully hired and stays with the company for a specified period. This develops a culture of collaboration and team building.
Project completion bonus: Employees who complete a specific project or meet a deadline on time receive this type of monetary reward. It’s a common practice for projects requiring short-term focus.
Retention bonus: This incentive for employees is offered to encourage them to stay with the company for a set period. Often used in critical transitions, this helps the company retain key team members during important phases.
Signing bonus: A monetary incentive provided to new hires as part of their compensation package to attract talent. This can be offered on top of the annual salary.

By offering a mix of these discretionary bonuses, companies can promote a culture of recognition, increase employee engagement, and drive performance goals across the board.

Components of discretionary bonus

When it comes to discretionary bonuses, several components shape how they are structured. Let’s explore what goes into these bonuses:

Performance criteria: How are employees performing? Bonuses are often tied to meeting or exceeding performance goals—whether on an individual or team level.
Financial health of the company: How is the company doing? If profits are up, employees might share in the success through profit-sharing bonuses.
Timing: When should bonuses be awarded? Companies can offer them quarterly, annually, or as spot bonuses for standout performances on the go.
Eligibility: Who qualifies? Not everyone may be eligible. Some companies reserve retention bonuses or project completion bonuses for key contributors or top performers.
Payout type: How do you reward employees? Bonuses can come as cash, gift cards, or other monetary incentives based on company preference.
Duration: Are bonuses short-term or long-term? Some, like year-end bonuses, are tied to shorter time frames, while retention bonuses focus on keeping employees for the long haul.

Benefits of discretionary bonus

Now, why should you care about discretionary bonuses? Here are some key benefits:

Boosts motivation: Imagine knowing you can earn a performance-based bonus for going above and beyond. That extra push can really motivate employees to meet those performance goals and contribute more.
Increases retention: Who doesn’t love being valued? Bonuses like retention bonuses offer employees more reasons to stay, keeping your best talent on board and reducing turnover.
Improves performance: Want better results? Reward your top performers with financial incentives to encourage a continuous push for excellence across the team.
Encourages teamwork: Do you want employees to work together? Employee referral bonuses motivate team members to refer great candidates, helping to build a collaborative and engaged team.
Aligns with company success: How connected do your employees feel to the company’s success? Profit-sharing bonuses ensure employees benefit when the company does well, promoting a shared sense of achievement.
Flexibility: Whether you’re rewarding individual contributions or aligning bonuses with a business strategy, discretionary bonuses can be tailored to meet both short-term and long-term goals.

Discretionary vs. non-discretionary bonus

The key difference between a discretionary and non-discretionary bonus lies in how and when the bonuses are awarded.

A discretionary bonus is given at the employer’s discretion, meaning there is no pre-determined promise to employees about when or how the bonus will be given. Employers can decide to offer these bonuses based on performance, company success, or individual employee contributions. These bonuses are not part of the employee’s expected compensation and can vary in amount and frequency.

On the other hand, a non-discretionary bonus is pre-determined and promised to the employee. It is often tied to specific goals, targets, or criteria, such as performance goals or project completion. Employees expect this type of bonus as part of their compensation package, and it is often outlined in the employment contract.

How to implement discretionary bonuses for employees

Implementing a successful discretionary bonus program involves several key steps:

Define criteria: Clearly identify the behaviors, achievements, or performance goals that qualify employees for a discretionary bonus. This could include individual performance, customer service achievements, or team contributions.
Communicate transparently: Although discretionary bonuses are flexible, it’s important to communicate their purpose and potential to employees. Make sure team members understand that bonuses are based on performance and company success, not guaranteed.
Align bonuses with company values: Ensure that the bonus criteria reflect the values and goals of the company. For example, if customer service is key, reward employees who consistently go above and beyond in that area.
Vary the type of bonus: Offer a mix of monetary rewards, such as cash bonuses, and non-monetary incentives like gift cards or extra time off. This provides flexibility and personalizes the recognition for employees.
Be fair and consistent: It’s important to award discretionary bonuses in a way that feels fair and motivates all team members. Ensure that there is consistency in how these bonuses are offered, so employees understand they are being rewarded based on objective criteria.
Review regularly: Evaluate the discretionary bonus program periodically to ensure it’s motivating employees effectively and aligning with business goals. Adjust the criteria or bonus amounts as necessary.

Implementing discretionary bonuses thoughtfully can significantly boost employee performance, promote loyalty, and drive the company towards its long-term goals. Using performance-related pay principles alongside discretionary bonus programs creates a stronger motivational link between effort and reward, improving both engagement and retention.

Frequently asked questions

A discretionary bonus is an additional payment made to employees at the employer’s sole discretion, not guaranteed by contract or defined by a fixed formula. The employer decides whether to pay it, who receives it, when it is paid, and how much it is. It can be given for any reason — exceptional performance, a successful year, or as a morale boost — without creating a legal entitlement.

A discretionary bonus is not promised in advance and can be changed or eliminated without legal consequence (if properly structured). A non-discretionary bonus is part of the employment agreement — promised to employees based on meeting specific criteria (sales targets, project completion, attendance). Non-discretionary bonuses must be included when calculating overtime pay under FLSA.

No. By definition, discretionary bonuses are not legally required. However, if an employer creates a pattern of paying them regularly, employees may argue a legitimate expectation of receipt — potentially converting what was intended as discretionary into an implied contractual right. Clear written communication that bonuses are not guaranteed helps maintain their truly discretionary nature.

Best practices: communicate clearly that bonuses are not guaranteed and that payment, amount, and eligibility may vary year to year; avoid language that could create a reasonable expectation of payment; document criteria used in decisions (even if not formulaic) to demonstrate consistency and avoid discrimination claims; and explain the rationale when significant variation occurs across similarly-situated employees.

Common factors include: individual performance and contributions, team or department performance, company financial performance, market conditions, time of year and budget availability, employee’s tenure and role, and manager’s subjective assessment of the employee’s impact. Because these factors are subjective, employers must apply them consistently across protected class boundaries.

Yes. Even though bonuses are discretionary, employers can face liability if: bonuses are paid in discriminatory patterns (e.g., consistently less to women or minorities in similar roles), the bonus program creates a legitimate expectation of payment, bonuses are withheld in retaliation for protected activity, or bonus criteria disproportionately exclude protected groups. Regular audits of bonus distribution patterns are essential.