With the holidays and the end of the year approaching, many employers consider bonuses for their employees. Bonuses can be used to incentivize good performance or to show appreciation to hard-working employees. While bonuses are common among many companies, every business has a different philosophy for what bonuses should be used for and how they should be distributed. To provide some insight into your next bonus cycle, here is a quick, helpful guide with a few tips.
Diving Deeper into Bonus Structures: Discretionary vs. Non-Discretionary Bonuses
1. Non-Discretionary Bonuses: Setting Expectations in Stone
Non-discretionary bonuses, often referred to as performance-based or formula-driven bonuses, are essentially bonuses with a predetermined framework. These bonuses are typically outlined explicitly in an employee’s contract or a dedicated bonus plan devised by the company. The terms are established beforehand, stating that a bonus will be disbursed if specific conditions are met. These conditions can encompass a wide array of factors, ranging from achieving certain sales targets to meeting project deadlines. The defining feature of a non-discretionary bonus is the clear-cut criterion that triggers its allocation.
For instance, imagine a software company that promises a non-discretionary bonus of 10% of an employee’s annual salary if they successfully deliver a project within the specified timeline. In such cases, employees have a reasonable expectation that, upon meeting the agreed-upon conditions, they will receive the stipulated bonus. This serves as a motivational tool, encouraging employees to strive for excellence and meet predefined objectives.
2. Discretionary Bonuses: The Element of Managerial Choice
On the other end of the spectrum, we have discretionary bonuses, which bestow a significant degree of decision-making power upon the company or the immediate manager. Unlike non-discretionary bonuses, these bonuses are not guaranteed, and their allocation is contingent upon the subjective judgment of those responsible for their distribution. A discretionary bonus is typically granted as a reward for exceptional performance that goes beyond the ordinary expectations of an employee’s role.
Imagine a marketing agency where the management decides to award discretionary bonuses to employees who consistently go above and beyond their assigned tasks, demonstrate exceptional leadership, or contribute innovative ideas that substantially benefit the company. This type of bonus is a tool for acknowledging extraordinary efforts that might not necessarily align with predefined criteria.
Navigating Compliance and Implications
It’s worth noting that from a legal standpoint, non-discretionary bonuses can have distinct implications. For instance, under the Fair Labor Standards Act (FLSA) in the United States, non-discretionary bonuses are considered part of regular wages for non-exempt employees. This means that such bonuses must be factored into overtime calculations, which can pose compliance challenges for employers. Adhering to these regulations is essential to avoid potential legal repercussions and uphold fair labor practices.
Times You Might Reward Your Employees with a Bonus
Bonuses are typically tied to an individual’s performance, the company’s performance, or loyalty or milestones. Some companies may also give out holiday or appreciation bonuses that are not performance-based.
Performance Bonuses: Performance-based bonuses are designed to encourage employees to do good work or to reach specific goals. Employers that want to encourage employees to reach a specific goal usually use non-discretionary bonuses. This encourages employees to work towards something throughout a specified time period in order to receive their bonus. Other employers may choose to reward performance after the fact and not tie it to a specific performance metric. This allows managers to reward workers that perform well in softer, less measurable areas.
Company Performance Bonuses: When a company has a successful year, they will often reward their employees by giving them an extra share in the profits. These bonuses can be the same for every employee or they can be tied to some performance metric that measures the employee’s contribution to the company’s success that year. Company performance bonuses are a great way to show employees that they play a role in the company’s overall success. They are also a great way to tie bonuses to an amount that a company can afford based on its yearly profits.
Loyalty/Milestone Bonuses: A loyalty bonus is given to an employee when they reach a certain milestone in their career. Often this is a certain number of years worked at a company, but it can also be tied to something like certification or a long-term sales target. Milestone bonuses help employees who are invested in the business feel that they are appreciated for their hard work and loyalty.
Holiday Bonuses: Some employers choose not to tie their bonuses to performance, but use them as yearly appreciation gifts for employees. Holiday bonuses can give employees something to look forward to every year and can help boost company morale.
Ready to Streamline Your Bonus Distribution?
If the complexities of bonus distribution and tracking are causing you headaches, don’t fret. LBMC Employment Partners is here to simplify the process for you. Our expert team specializes in optimizing bonus structures, ensuring compliance, and fostering a motivated workforce. Whether you’re seeking guidance on non-discretionary bonuses, looking to implement a discretionary bonus system, or grappling with the intricacies of bonus-related regulations, we’ve got you covered.
Don’t let bonus management become a daunting task – reach out to LBMC Employment Partners now to unlock a world of tailored solutions that align with your business goals. Contact us today and take the first step towards a smoother, more efficient, and rewarding bonus program. Your employees will thank you, and your business will thrive with a well-managed bonus strategy in place.