A discretionary bonus is a cash award given at the discretion of someone with financial authority, usually based on individual performance and other factors. It cannot be contracted or earned through any specific channel and is not guaranteed. It is subject to income tax and is usually awarded at the end of the year.
A discretionary bonus is a cash award that a boss or supervisor bestows on an employee solely by choice. It’s called “discretionary” because it’s given at the discretion of someone with financial authority. For this reason, a discretionary bonus cannot be contracted or earned through any specific channel. Employees are entitled to fair wages and pay for time worked, but a discretionary bonus is different. It’s not something that can be requested or even expected in most cases.
Corporations and businesses often motivate employee productivity by setting up cash bonus structures. There are two main types of bonuses: those based on performance and those that are discretionary. Both are usually awarded at the end of the year.
A performance bonus tends to be very simple. Employees who meet certain goals or achieve defined results are usually allowed to collect. More often than not, a rewarding performance bonus is a contractual arrangement. Any employee who meets the terms will receive payment.
Things are much murkier where discretionary bonuses are concerned. Employers often advertise the possibility of this type of reward as a way to motivate workers. There is no promise of payment, however, and the prize depends much more on simply meeting the stated objectives.
Individual performance is a large part of most discretionary bonus awards. That’s usually not the only factor. The overall health of the business, the amount of money there is to spend, and the number of deserving employees can all factor into whether or not a discretionary bonus is awarded.
In most cases, discretionary bonuses cannot be forced. Even employees who believe their performance is worthy of recognition usually have no reason to seek discretionary recognition. As such, there is a latent potential for abuse in this structure that is not present with performance-based bonuses, as employers can dangle hope for a bonus that may or may not have ever actually existed.
Companies often refrain from setting a strict discretionary bonus policy to minimize expectations. Most corporate literature only talks generally about bonuses at will. The choice to award a discretionary bonus is usually made on many different factors and companies tend to keep the process rather vague. This gives them the flexibility to award prizes without having to meet specified criteria first.
Most countries treat income earned with discretionary bonuses as income, even if it is not part of a salary and is subject to change from year to year. People living in income tax jurisdictions 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 upon assignment.
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