A discretionary bonus is a monetary award that a boss or supervisor bestows upon an employee purely by choice. It is called “discretionary” because it is given at the discretion of someone with financial authority. For this reason, a discretionary bonus cannot be contracted or earned through any specific channels. Employees are entitled to fair wages and pay for time served, but a discretionary bonus is different. It is not something that can be demanded, or even expected in most circumstances.
Companies and firms often motivate employee productivity by setting up monetary bonus structures. There are two main types of bonuses: those that are performance-based and those that are discretionary. Both are usually awarded at the end of the year.
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A performance bonus tends to be very straightforward. Employees who meet certain goals or achieve defined results are usually entitled to collect. Most of the time, a rewarding performance bonus is a contractual agreement. Any employee who satisfies the terms will receive the payment.
Things are much murkier where discretionary bonuses are concerned. Employers often publicize the possibility of this sort of reward as a way to motivate workers. There is no promise of payout, however, and award depends on a lot more than simply meeting stated goals.
Individual performance is a major part of most discretionary bonus awards. It is not usually the only factor, though. Overall corporate health, the amount of money that there is to spend, and the number of deserving employees can all play a part in whether or not a discretionary bonus is awarded.
In most cases, discretionary bonuses cannot be compelled. Even employees who feel that their performance is worthy of recognition usually have no grounds on which to demand that a discretionary award be made. As such, there is a latent potential for abuse under this structure that is not present with performance-based bonuses, as employers can dangle the hope of a bonus that may or may not have ever really existed.
Companies often refrain from setting a hard-and-fast discretionary bonus policy in order to minimize expectations. Most corporate literature speaks only generally about at-will bonuses. The choice to award a discretionary bonus is usually made on a lot of different factors, and companies tend to keep the process rather vague. This gives them the flexibility to give awards without having to meet specified criteria first.
Most countries consider money earned from discretionary bonuses to be income, even though it is not part of a salary and is prone to change from year to year. People who live in jurisdictions with income tax are almost always taxed on bonus earnings, usually at the same rate as their ordinary earnings and wages. Depending on the employer, taxes may or may not be withheld at the time of the award.