Non-Discretionary Bonus

What is a Non-Discretionary Bonus?

 

Non-discretionary bonuses are bonuses guaranteed based on different criteria. An employer follows a predefined algorithm for choice.

 

Here are some key characteristics of non-discretionary bonuses:

 

1. Pre-determined criteria: The conditions or metrics for earning the bonus are defined clearly in advance, and employees are aware of what they must do to qualify for a bonus. once the criteria are met, the employer is obliged to pay the bonus; it is not at the employer’s discretion.
2. Impact of Overtime Calculations: In many jurisdictions, labor laws require that non-discretionary bonus payments be taken into account when calculating overtime compensation.
3. Examples: Examples include attendance bonuses or bonuses based on performance, sales commissions, or bonuses based on productivity.

 

A bonus that is tied to specific performance goals can be used to motivate employees.

 

How are Non-Discretionary Bonuses Taxed?

 

Bonuses that are not discretionary are taxed at the same rate as regular income. Federal, state, and local income taxes, as well as Social Security, Medicare, and other taxes, are all applicable. The employer will usually withhold tax from the bonus at the same rate that they do on regular wages or use a flat rate of federal withholding (often 22% in the U.S.). The exact rate can vary depending on an employee’s tax and income situation.

 

Non-Discretionary Bonus Examples

 

Examples of non-discretionary bonuses include:

 

1. Attendance bonus: The bonus is awarded for meeting specific attendance targets.
2. Performance bonus: Awarded when performance goals are met.
3. Bonus for Productivity: Based upon achieving a certain level of output.
4. Safety bonus: Given when employees achieve safety standards or are accident-free over some time.
5. Sales Commissions: Earned by meeting or exceeding sales goals.

 

The bonuses will be guaranteed if certain conditions are met.

 

Discretionary Bonus vs Non-Discretionary Bonus

 

Discretionary Bonus:

 

• Voluntary: Done at the employer’s discretion and without promise
• Unplanned: There are no pre-set criteria, and the amount is often a surprise.
• There is no obligation: The employer decides when and how much to pay, if applicable.
• Examples: Year-end holiday bonus, unexpected rewards for exceptional work.

 

Non-Discretionary Bonus:

 

• Mandatory: Based upon pre-determined criteria such as performance targets.
• Planning: Employees are aware of conditions and amounts before they arrive.
• Guaranteed: Must pay when conditions are met.
• Examples: Attendance bonus, sales commission, productivity bonus.

 

Non-discretionary bonus payments are made when certain criteria are met, while discretionary rewards are paid at the employer’s discretion.