What Are the Two Types of Bonuses?

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What Are the Two Types of Bonuses?

Bonuses are extra payments that employers give employees in addition to their regular salary or wages. In the workplace, bonuses are usually divided into two main types: discretionary bonuses and non-discretionary bonuses. The difference comes down to whether the employer promises the bonus in advance or decides to give it freely.

1. Discretionary Bonuses

A discretionary bonus is a reward that the employer chooses to give without making a promise beforehand. The employer decides whether to pay it, who receives it, and how much it will be. Employees should not expect this type of bonus as part of their normal pay.

For example, a company may give a surprise bonus to an employee who handled a difficult customer problem very well. Another example is a one-time holiday bonus given to the whole team when the business has a successful year. Because the employer did not promise these payments in advance, they are discretionary.

Discretionary bonuses are useful for recognizing special effort, teamwork, or exceptional results. They give employers flexibility, but employees should not rely on receiving them regularly.

2. Non-Discretionary Bonuses

A non-discretionary bonus is a bonus that is announced or promised in advance and is based on clear rules or goals. If the employee meets the stated requirements, the employer is expected to pay the bonus. These bonuses are often linked to performance, productivity, attendance, sales, or retention.

For example, a salesperson may be promised a bonus for reaching a monthly sales target. A company may also offer an attendance bonus to workers who complete a set number of days without missing work, or a retention bonus to employees who stay with the company until a specific date.

Non-discretionary bonuses help motivate employees because they know exactly what they need to do to earn the reward. They also create a clear connection between effort, results, and extra pay.

Key Difference Between the Two Types

The main difference is expectation. A discretionary bonus is a surprise reward that the employer may choose to give, while a non-discretionary bonus is a planned reward that employees can earn by meeting agreed conditions.

Type of Bonus How It Works Example
Discretionary bonus The employer decides freely whether and how much to pay Surprise bonus for excellent work
Non-discretionary bonus The bonus is promised in advance and tied to clear goals Bonus for reaching a sales target

In simple terms, a discretionary bonus is an unexpected “thank you,” while a non-discretionary bonus is a reward employees work toward. Both can improve motivation, but they serve different purposes in a company’s pay structure.

FAQ

Types of Bonuses Explained

What Are the Different Types of Bonuses? Bonuses are extra payments that employers give on top of regular pay. Companies use them to reward good work, attract new workers, keep valuable employees, and share business success. The most common bonus types are performance bonuses, spot bonuses, annual bonuses, sign-on bonuses, retention bonuses, referral bonuses, profit-sharing bonuses, and commission bonuses. Performance Bonuses Performance bonuses are given when a worker, team, or department meets a goal.

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Types of Bonuses Explained Learn the different types of bonuses including performance annual sign-on retention referral profit-sharing and commission bonuses in a clear and easy-to-read guide.

What Are the Different Types of Bonuses? Bonuses are extra payments that employers give on top of regular pay. Companies use them to reward good work, attract new workers, keep valuable employees, and share business success. The most common bonus types are performance bonuses, spot bonuses, annual bonuses, sign-on bonuses, retention bonuses, referral bonuses, profit-sharing bonuses, and commission bonuses. Performance Bonuses Performance bonuses are given when a worker, team, or department meets a goal.

03/15

What Is a Bonus? 10 Types That Will Boost Your Income Discover what a bonus is and explore 10 common types including performance spot annual sign-on profit-sharing and commission bonuses. Learn how bonuses work their tax treatment and why companies offer them to motivate employees and boost productivity.

What Is a Bonus and Its Types? A Complete Guide A bonus is extra money or a reward an employee gets besides their regular salary or hourly pay. Think of it as a thank-you payment from your employer for doing great work, hitting targets, or staying with the company. For example, if you earn $50,000 a year and get a $5,000 bonus, your total compensation becomes $55,000. Companies use bonuses to motivate employees, boost productivity, and keep top talent from leaving.

03/04