Thinking of implementing an incentive program, and wondering what the difference is between a discretionary bonus vs performance bonus?
That’s what we’re answering in this article today. So join our incentive program experts to go through the differences, benefits, and other aspects of discretionary bonuses vs performance bonuses. Let’s start with a quick answer…
A discretionary bonus is an extra payment given at the discretion of management, usually in appreciation for an employee’s work. It is generally not an entitlement and can vary significantly. A performance bonus is usually paid to employees based on predetermined criteria or a company’s performance.
A key point of difference is that a performance bonus amount is usually predetermined, and often linked to specific targets that the employee needs to meet in order to qualify.
You can find out more about what a bonus is here. But to answer this in more detail, let’s begin by defining what each of these types of bonuses is and how they work, and then we’ll go through the benefits of each to help you understand how and when to implement each type of bonus.
What is a discretionary bonus?
A discretionary bonus is a type of incentive given to employees, usually at the employer’s sole discretion.
This bonus is usually awarded as recognition for outstanding performance. Or, for special achievements …and is not based on any predetermined criteria.
It is also not a contractual obligation, so the employer is not obligated to award such bonuses. This can lead to problems further down the road which we’ll explore shortly.
When a discretionary bonus is given, it is typically paid out of an employer’s profits. A discretionary bonus is usually paid out in addition to salary and any other fixed bonuses or incentives.
What is a performance bonus?
A performance bonus is a type of incentive given to employees based on their performance against predetermined goals.
Performance bonuses are more specific in nature, with predetermined criteria that must be met by employees in order to receive them. These bonuses typically come with specific objectives or targets that the employee must meet in order to receive the full bonus amount.
Performance bonuses are often performance-based, meaning that the amount of money an employee receives is directly related to their performance.
This type of bonus can be useful in motivating employees, particularly if they are paid on a commission-based structure or if the organization is working towards specific goals.
Performance bonuses can also help to reward employees for their efforts, encouraging them to continue striving for excellence.
Merit-based bonus
In addition to performance bonuses, merit-based bonuses may be used by some organizations. Merit-based bonuses are usually given out at the end of a year or after an employee has achieved a certain milestone.
According to a study by Statista, 44% of incentive programs include an annual or biannual-based bonus of this type.
These bonuses are typically intended to reward employees for their contributions to the organization. Such as staying with the company for a specified length of time or achieving high levels of customer satisfaction.
Merit-based bonuses are most commonly given to employees who have gone above and beyond the call of duty in some way, providing a valuable service or making an impact on the company’s profitability.
In addition to a monetary bonus, organizations may also offer something tangible as a bonus, such as tickets to an event, a gift card or certificate, additional vacation days, or even company stock.
Benefits of a discretionary bonus
Every type of bonus scheme is designed to reward some achievement, event, criteria met, or high performance.
The benefits of providing a discretionary bonus program can include
- Improved morale
- Increased engagement and loyalty
- Appreciation for hard work
- Recognition of employees’ accomplishments.
However, despite having some benefits, employers should be wary when it comes to discretionary bonuses. Their decisions on bonuses have a direct influence on employees’ attitudes, and those decisions can backfire.
Discretionary bonus schemes are not predictable and may be perceived as unfair. they can encourage grievances that will stay with an employee for some time. They can also lead to rivalry between employees, creating an unhealthy working atmosphere.
If discretionary bonuses are utilized at all, then they should be used in conjunction with other incentive programs. They should be tied to specific goals and objectives. This helps to ensure that the bonus is given in a fair and consistent manner.
Benefits of performance bonus
If you’re considering a performance bonus, then the benefits can include:
- Greater employee satisfaction
- Increased loyalty to the organization
- Improved morale.
These benefits can ultimately lead to improved business performance and higher profitability.
Additionally, performance bonuses can help show employees that their hard work is appreciated and valued. This can lead to better retention rates and improved working relationships between managers and employees.
Finally, performance bonuses can be used to help build a company culture and find a balance between the carrot and the stick. One that values excellence and rewards those who go above and beyond.
Both discretionary bonuses and performance incentives are reflected in studies such as the one by statists, which show the breakdown of common incentives offered.
Can a performance bonus be discretionary?
Yes, performance bonuses can be discretionary. For example, an employer might give a bonus to one employee for extraordinary work while another who did the same job might not be rewarded.
Discretionary bonuses can also be given for special projects, outstanding customer service, or for simply going above and beyond what is expected.
Discretionary bonuses are important for building a company culture.
One that values excellence rewards hard work and encourages employees to strive for success.
However, unless you implement an incentive program successfully, or inconsistently, discretionary bonuses can lead to confusion and even resentment among employees.
Therefore, it is important for employers to be clear about the criteria used. Based on the industry they’re in, or by departments, for determining when and how discretionary bonuses are awarded, or risk alienating employees.
We can help you navigate the implementation of an incentive scheme that is right for your organization.
Discretionary bonus vs performance bonus – Can you have both?
Yes, employers can have both a discretionary bonus and a performance bonus program in place.
When running both programs, ensure that each is distinct. And that the criteria for earning a bonus are clearly communicated to employees.
For example, discretionary bonuses may be used to reward employees who go above and beyond their job duties. While performance bonuses reward employees who meet pre-established goals.
Having both bonus programs in place allows employers to recognize and reward employees for different kinds of accomplishments. But, discretionary bonuses can be difficult to maintain in a fair way over the long term.
It is important that:
The bonus criteria for each type of bonus program are clearly communicated to employees. So they understand what is expected of them and know that their performance will be rewarded.
Employers should ensure that the criteria they use for bonuses are fair and equitable for all employees. If the criteria for a bonus program are biased in favor of certain types of employees or based on subjective measurements, it could lead to workplace resentment and tension.
Employers should be sure that the bonus programs they create are tied to measurable performance benchmarks and outcomes. This way, employees can see the direct correlation between their efforts and the rewards they receive for them.
By having an objective measure of performance, employers can ensure that their bonus programs are fair and effective. This will motivate employees to reach their goals and foster an atmosphere of collaboration and cooperation.
Rounding up and next steps!
Ultimately, performance incentives can help increase employee motivation, engagement, and productivity. They also show employees that their hard work is appreciated and valued by the organization.
It is important to ensure that any incentive program is fair, and consistent. It should meet the needs of both employers and employees. This is why you should be cautious if looking to implement a discretionary bonus.
Using these bonuses in combination with other rewards and recognition programs can help to create a healthy work environment. One where employees feel appreciated and motivated.
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Finally, when looking at discretionary bonus vs performance bonus, employers should remember that offering incentives are only one part of a successful employee engagement program.
Creating an environment that nurtures collaboration, open communication, and meaningful feedback is also a key component that will ensure employees remain loyal and engaged.
By investing in their people, employers can create a strong culture of performance, recognition, and motivation. To begin your incentive program journey, click here to organize a demo, or contact us for more information.
