What is a discretionary bonus And why you shouldn’t use them.
Did you know that offering your employees the right type of bonuses could be the difference between a contented and motivated workforce or one on shaky ground? So what is a discretionary bonus?Discretionary bonuses …sometimes referred to as incentive-based compensation, are one way for business owners to reward their staff for good performance. However…
Although it can be tempting to hand out these cash rewards as a quick fix, or in a moment of gratitude, in reality, discretionary bonus plans should be carefully considered in order to ensure long-term employee satisfaction and loyalty.
In this article, we’ll explore exactly what is involved in offering discretionary bonuses and why simply throwing money at the problem might not always lead to positive results.
So let’s get the brief answer first so you can understand more easily what this type of bonus is.
A discretionary bonus is a form of compensation given by an employer that isn’t predetermined by a plan or contract. It is usually provided as a recognition to employees for their hard work, exceptional performance, or appreciation of their services within the company.
Ok so now we’ve got the short answer in the bag, let’s discover discretionary bonuses in more detail.
What is a discretionary bonus?
A discretionary bonus is an additional form of payment an employer may provide to employees outside of their salary or wages.
Discretionary bonuses are not a contractual obligation …meaning that employers are not obligated to provide them and can choose how and when (or even if) they distribute them.
These types of bonuses are usually given in recognition of a job well done, such as meeting higher-than-expected performance targets or successfully completing a challenging project.
For clarification see our article on the difference between a discretionary bonus and a performance bonus.
At the same time, employers may also give out these awards to simply show appreciation for loyalty and years of work.
At OurlinQ, we are a performance-minded organization that makes decisions based on data, not whims, and this is reflected in our approach to implementing an incentive program that works.
Regardless of the reason why it’s given, it’s important for employees to realize that these payments often come with special tax regulations – so be sure to get familiar with tax laws surrounding such awards!
Let’s take a look at how those tax laws affect discretionary bonuses.
Tax laws surrounding discretionary bonuses
Taxing discretionary bonuses can be complex, with regulations that differ from one territory to another.
Generally, employers add bonuses to an employee’s total taxable income just like wages and salaries.
In certain areas, bonus money may qualify for preferential tax treatment.
For example, in the United States, some types of bonus payments are classified as deferred compensation under Internal Revenue Service rules; this means the employees will have to pay taxes when these funds are available instead of when they become payable.
A bonus can occasionally enter the category of “nontaxable income” depending on a few key factors: the purpose of the extra payment and the payment period.
Because of this complexity, many business owners learn all they can about local laws regarding taxation to ensure their employees have all their taxes paid adequately and sustainably for each financial year.
Ok, so that’s the background covered and one of the main reasons that discretionary bonuses can be difficult to implement with regard to complex tax issues.
So why else are these forms of bonuses not recommended as a way of rewarding your employees?
Read on to find out more.
Why are discretionary bonuses best avoided?
As we’ve discovered can certainly be used as motivation and reward for employees, but there are also several downsides associated with them which make them less than ideal.
Let’s find out why.
- Discretionary bonuses are not guaranteed and could leave employees feeling uncertain about their future earnings.
- If some employees receive bonuses while others don’t, it can create feelings of unequal treatment that may lead to dissatisfaction in the workplace.
- These bonuses can have a significant impact on your budget and may not always be feasible depending on the financial situation of the organization.
- It’s important to note that discretionary bonuses can be seen as a one-off reward and may not motivate employees in the long run.
- If used too often, discretionary bonuses can become an entitlement that employees expect. This not only reduces the value of the bonus itself but could also lead to resentment among those who do not receive it or feel they are receiving unequal rewards for their efforts
Therefore, it is much more beneficial to focus on creating an environment where employees feel valued and appreciated through ongoing feedback and recognition programs.
This will ensure your staff remains engaged and motivated …which ultimately leads to increased productivity in the workplace.
So although discretionary bonuses can be a useful tool for recognizing individual performance they should not be relied upon as a consistent incentive for employees in the long term.
It is important to consider all of the pros and cons before implementing this type of bonus structure so you can make sure it aligns with your organizational values and objectives.
Non-monetary incentives
Employee recognition programs should also include rewards that are not tied to a monetary value such as increased responsibility, flexible working arrangements, or the opportunity to attend conferences and workshops. Here are more reasons to set up an incentive scheme.
This will show your employees that you value them beyond their productivity or performance and are a great way to show your employees you appreciate their hard work and celebrate their successes.
In the workplace, these can be anything from flexible working hours or extra days off to creative activities like team-building exercises.
The key is to tailor the reward to suit each individual worker – something that might appeal to one employee might not be as meaningful for another.
By rewarding performance in non-monetary ways, you will get better results both from staff who are motivated and engaged, and those who feel that their job has more purpose and meaning.
As a real bonus, these kinds of incentives don’t cost anything beyond a bit of time invested in creating programs that benefit your employees – no matter what size your budget is.
There are, of course, other ways of incentivizing your workforce using financial rewards too.
What other types of monetary rewards can you offer employees instead?
When it comes to rewarding staff, discretionary bonuses can be an effective tool for recognizing individual achievement and providing extra motivation.
However, creating an environment where employees feel appreciated through ongoing feedback and recognition programs is just as important as providing financial incentives.
Doing so will help ensure your staff remains engaged and motivated to do their best. Remember, happy employees, are the key to a successful business!
So although discretionary bonuses come with certain pitfalls, businesses should still focus on developing their recognition program.
This could include things like verbal or written praise, awards ceremonies, gifts, or other financial incentives that reward consistent performance over time.
These kinds of initiatives not only provide more reliable rewards for employees but also create a culture of recognition that fosters a healthier and more productive workplace.
What is a discretionary bonus And Why You Shouldn’t Use Them– To end on
Ultimately, it is important to remember that while discretionary bonuses may seem like an attractive incentive, they are not always the best solution when looking to incentivize your staff.
Employers must take into account the potential risks associated with distributing these rewards and consider alternative ways to motivate and inspire their employees that meet everyone’s needs, based on the industry or the department.
By creating a workplace environment where everyone feels valued and appreciated, employers can foster loyalty among their team and encourage greater productivity.
