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What is a discretionary bonus?

A discretionary bonus can be a great motivator for many people, especially if they are working hard and doing their best.

Employers may also choose to award discretionary bonuses over other incentives because it offers flexibility when rewarding individual employees and individual performance within a company.

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What is a discretionary bonus?

A discretionary bonus is an incentive given as an award out of the sales manager’s discretion — hence the name.

This type of bonus is sometimes referred to as a non-quantified performance-based salary increment, not fixed to meet specific goals or targets. 

They are not guaranteed in your contract, and the design of these bonuses will largely depend on the arrangement between employers and employees who earn this type of pay “at a premium.”

In other words, it’s up to the employer when an employee will receive the bonus aside from their predetermined base and variable pay.

Why do employers give discretionary bonuses?

There are no hard and fast rules for awarding a discretionary bonus other than what the sales department thinks you deserve. Employers can also give a discretionary bonus where commissions are promised and do not conform to established guidelines.

Employers give bonuses for a variety of reasons. It could be to say “thank you” or motivate employees to do better. In other cases, companies may have a great end-of-year and want to share the wealth with their staff.

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This type of bonus is also awarded when the year is profitable, but managers are unsure how to divide it. One strategy they can take is to reward them differently based on how well they have done personally and the company.

A discretionary bonus can also motivate employees if salaries are not competitive enough to maintain or retain employees. Giving out a discretionary bonus is also a way to thank those who had performed well under difficult conditions or when the employer did not pay commissions due to lack of work or profitability.

How big are discretionary bonuses?

Discretionary bonuses can widely vary but are generally in the range of $50 to $10,000. The bonus value will depend on company policy and performance, individual contracts, and the employee’s performance.

Are discretionary bonuses taxed?

In many cases, a discretionary bonus is taxed as ordinary income. Tax rates may vary depending on the state and the individual’s situation.

In Summary

It is important to understand that discretionary bonuses are not guaranteed and vary depending on an employer’s discretion. Whether you’re looking for ways to motivate your employees or reward them for their hard work, it may be beneficial to consider this type of incentive as part of your compensation plan.

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