A nondiscretionary bonus is a form of extra pay that is based on specific, predefined conditions. Unlike discretionary bonuses, these are promised in advance and linked to clear performance metrics or goals. Employers typically offer them as part of a structured incentive plan.
Key Elements of a Nondiscretionary Bonus
For example, if an employee achieves a set sales target, they may qualify for a bonus. The characteristics of a nondiscretionary bonus generally include:
- It’s tied to an objective, measurable standard.
- Employees must meet a defined goal to qualify.
- The bonus structure is known to employees beforehand.
- Employees reasonably expect to receive the bonus if they meet the criteria.
- The employer does not have the flexibility to modify the amount or timing of the payment.
- It must be factored into overtime pay for non-exempt workers.
Why Employers Use Nondiscretionary Bonuses
Employers may choose to implement nondiscretionary bonuses for several strategic reasons:
- Boost performance: When employees know they can earn extra pay by reaching specific goals, they’re often more driven to perform.
- Enhance retention: Employees who consistently receive bonuses tied to their performance may feel more loyal to their employer.
- Recognize achievement: These bonuses serve as a formal acknowledgment of an employee’s efforts and results.
- Attract qualified candidates: Offering structured bonus opportunities as part of compensation can help attract high-caliber talent. Tools like Beyond can help manage and automate these bonus systems efficiently.
Impact on Overtime Pay
Under the Fair Labor Standards Act (FLSA), nondiscretionary bonuses must be included when calculating a non-exempt employee’s regular rate of pay. This affects how overtime pay is determined.
For example, imagine a non-exempt employee normally earns $800 for a 40-hour week, which equals $20 per hour. If they earn a $100 nondiscretionary bonus that week, their total pay becomes $900. Their adjusted regular rate becomes $22.50 per hour. Therefore, any overtime that week would need to be paid at 1.5 times that rate, $33.75 per hour.
Failing to include such bonuses in overtime calculations could lead to compliance issues and penalties, so it’s important for employers to stay accurate.
Common Types of Nondiscretionary Bonuses
Here are several examples of nondiscretionary bonuses employers may offer:
- Attendance bonuses: Rewarding employees who maintain perfect attendance over a set period.
- Performance bonuses: Granted for hitting specific performance targets or goals.
- Sales commissions: Offered when employees reach or surpass a defined sales quota.
- Referral bonuses: Given to current employees who successfully refer new hires that stay with the company for a designated time.
- Safety bonuses: Acknowledging employees or teams that maintain safety standards in the workplace.
- Signing bonuses: Offered to new hires as an incentive to accept a job offer.