Americans spend a lot of time at work, and they’re not necessarily happy about it. According to Gallup, 50% of the global workforce is “quiet quitting.” That is, disengaging and doing the bare minimum whilst they plan their departure. Another 18% are actually quitting. We know that turnover is detrimental to operational efficiency. It hurts the team dynamic and the bottom line. So, how can an employer make the investment worthwhile?
Alongside autonomy, compensation and recognition are key levers to improving employee morale. Including discretionary bonuses in your employee retention program can keep your talent engaged and raise your workplace rating from good to great.
What Is a Discretionary Bonus?
A discretionary bonus is defined as additional compensation outside of what is detailed in the employment contract. The employer independently and subjectively decides how much and to whom to award a discretionary bonus. This compensation is not tied to a specific outcome, it is usually an act of appreciation for the employee and their commitment to the work.
Discretionary bonuses are great for motivating employees and strengthening organizational structure. If employees feel that their efforts will be recognized and rewarded, they are more likely to dedicate themselves more fully to the work. Research from Oxford states that happy employees are linked to a 13% increase in productivity, making employee morale of particular importance. Although discretionary bonuses are legally included in overall employee compensation, they are unplanned and regarded separate from any performance based bonuses.
What Is a Non-discretionary Bonus?
Conversely, there are non-discretionary bonuses. Non-discretionary bonuses require that an employee meet a specific set of criteria to receive the bonus. The employee is aware of the requirements ahead of time and must complete them within a defined work period.
The most common type of nondiscretionary bonus is a performance-based bonus. Employees must hit certain goals or metrics to qualify for these bonuses. For example, a sales representative may be asked to close a certain number of new accounts per quarter.
Other forms of nondiscretionary bonuses include “signing” or hiring bonuses, where an employee is awarded a certain amount of money for agreeing to join a company. Usually, these are offered to attractive candidates to sweeten the deal. This is particularly common in industries with many competing employers within the area, think Wall Street or Silicon Valley. The financial incentive can attract the brightest minds in the industry while remaining cost-effective, as it is a one-time payment.
Reasons for a Discretionary Bonus
There are many common reasons to reward employees with additional compensation. So long as the bonus is not tied to a specific metric or goal, an employee may be awarded a discretionary bonus for any of the following reasons.
Going Above and Beyond
If there is a person on the team that consistently exceeds the expectations of their role, it may be appropriate to recognize such efforts with an unexpected bonus. Perhaps they show patient consideration to difficult clients or boost team morale by offering positive feedback to their peers.
A little recognition, and money, can go a long way.
Holidays
Depending on the customs in your region, there may be an opportunity to commemorate a specific holiday by bonusing employees. This will not only be an act of appreciation and goodwill, but can also help alleviate financial stress at an otherwise costly time of year.
Spearheading an Initiative
Sometimes, companies want to explore new initiatives but lack a dedicated leader to drive them forward. If someone on the team raises their hand to organize and lead, they may be rewarded at the project completion. Resentment can build if employees make themselves available for additional projects but are not recognized and compensated for their efforts.
Profit Sharing
Profit sharing is when the company distributes a portion of its profits to the team. These types of bonuses are amazing for increasing employee buy in. Employees may grumble at consistent reminders about how well a company is outperforming targets if none of that capital trickles down. Profit sharing as a reward can maintain goodwill, increase creativity and keep the team motivated.
How To Implement Discretionary Bonuses
To incorporate discretionary bonuses into your annual plan, it’s essential to carefully review the details for legal compliance while also aligning decisions with your business needs. In planning for this process, ensure that you have a qualified team of human resource professionals to prevent any costly missteps.
Review Your Local Employment Laws
Confirm that your discretionary bonus plan complies with local employment law. If you have non exempt employees, you must give consideration to wage, hour and overtime legislation.
Discrimination claims are also a concern. If handled incorrectly, employees that don’t receive discretionary bonuses could feel discriminated against. For this reason, review all Equal Employment Opportunity (EEO) laws to mitigate risk.
Keep the bonuses discretionary by being clear that they are not tied to a specific metric and they are not expected to reoccur. The timing with which discretionary bonuses are given should be random to avoid compliance issues.
Funding Discretionary Bonuses
Although discretionary bonuses are not tied to any specific employee’s performance, company performance can impact the bounds of the payout. If the company is doing particularly well, bonuses could be larger. Whereas, if the business is struggling, award amounts may be more modest.
With this in mind, always ensure that the bonus amount is sizable enough that the employee will delight in it. Bonuses that are too small could have the opposite effect and offend employees.
Discretionary bonus funds should be kept separate from the pool of money allocated for wages. Set aside an amount of money that can be paid out to employees for discretionary bonuses each fiscal period. Guidelines for disbursement timing should be clear to management so that they can make decisions about award amounts. On the other end, be sure that your payroll management system is equipped to correctly categorize and distribute these discretionary bonuses. The last thing you want is tax trouble.
Discretionary Bonuses Pay Dividends
Honoring employees with monetary recognition for their dedication to the company is an effective strategy for boosting employee satisfaction. By building discretionary bonuses into your annual budget, you stand to maximize the potential of your workforce. Employees report greater satisfaction when their efforts are recognized and compensated, and discretionary bonuses do just that!
By making employee contentment a priority, you’ll set your work culture up for success. Engaged employees will lead to greater innovation and sustained growth. Not only will discretionary bonuses help to prevent turnover, they will help you attract new talent as well.
Use this tool effectively to develop a more loyal employee base. You might get a better Glassdoor rating out of it too!
