For a bonus to be considered discretionary, it should be awarded at the sole discretion of the employer rather than expected to be received by the employees. A discretionary bonus is a form of variable pay; the amount, requirements, timing and announcement of the bonus should not be disclosed in advance, as this may appear to be a motivator or incentive implying that meeting certain levels would guarantee a bonus or reward. The employer determines after the fact that there is a reason for awarding a bonus, such as reaching company and financial goals, or chooses to reward an individual employee after exceptional performance.
A nondiscretionary bonus is the opposite of a discretionary one. The employer predetermines the specific criteria that is required to receive a bonus, and employees expect to earn the bonus if they meet the criteria. An employer's incentive pay plan that provides additional compensation for exceeding performance or productivity goals is an example of a common nondiscretionary bonus.
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