Discretionary Bonus

A discretionary bonus is extra pay an employer chooses to give an employee without any prior promise or commitment to do so. There doesn’t need to be a stated reason behind it, and it’s not tied to hitting specific goals or targets. Nor is there typically a set amount or date attached, the employer decides both on the fly.

Types of discretionary bonuses

Referral bonus. Companies often offer these to current employees for bringing in new hires. For a referral bonus to count as genuinely discretionary, a few conditions usually need to hold: the employee joins the referral effort voluntarily, recruiting doesn’t eat up significant work time, and the employee is essentially just reaching out informally to friends, family, or acquaintances in their own free time.

Retention bonus. These tend to show up in specific situations, a merger, an acquisition, or a critical project the company needs to see through. When an employee’s future at the company feels uncertain, a retention bonus gives them a reason to stay through a defined period and keep contributing.

Holiday bonus. Around Christmas, New Year’s, or other special occasions, employers might offer a bonus, cash or a gift, depending on what’s customary for that company. That said, if a holiday bonus becomes a predictable, expected annual tradition, it actually stops being discretionary at that point and starts functioning more like a contractual obligation.

How do you build a discretionary bonus plan?

Consistency matters here, especially once a company has settled on how it calculates and pays out bonuses. The process should stay as simple and predictable as possible. A solid discretionary bonus plan tends to share a few qualities:

Simple. Keep the strategy easy to understand. Employees should have a general sense of why they’re earning a bonus, and managers should know when and how to use them.

Equitable. Every employee, across every department, should have a genuine shot at earning a bonus, with amounts that feel fair and proportionate.

Timely. Bonuses should go out during the same pay period they’re awarded in. They also shouldn’t be tied to predictable, known dates, doing so risks turning them into something non-discretionary by definition. Adjust frequency as needed.

Relevant. A bonus should actually mean something to the person receiving it, giving them a real sense that the recognition was earned and deserved.

Material. The bonus needs to carry real weight. Something too small or a cheap token gift can backfire, leaving employees feeling undervalued rather than appreciated.

How do you calculate a discretionary bonus?

Employers can simply set a fixed amount based on available budget, or use one of a few common formulas:

• Percentage of sales: divide an employee’s total sales by a fixed figure
• Bonus per sale: divide the total bonus pool by the number of sales made
• Even split: set a total bonus amount and divide it evenly across employees
• Hours-based: total up hours worked across employees, divide the bonus pool by total hours to get a rate, then multiply that rate by each employee’s individual hours