Discretionary Bonus

Meaning & Definition

A Discretionary Bonus is an extra payment made to an employee by an employer when no pre-existing contract requires the payment to be made. The payment of a discretionary bonus is generally made as a reward for achieving outstanding performance, receiving a bonus due to the profitability of the business, or receiving a bonus for extraordinary achievements; therefore, there are no set amounts for these types of payments.

Importance of Discretionary Bonus

• Recognize employees with outstanding performance.
• Motivate employees beyond their base pay.
• Flexible piece within compensation planning. 
• Aligning rewards with business performance. 
• Create a performance-driven culture.

Legal Compliance & Policies

The Payment of Bonus Act, 1965, does not cover discretionary bonuses since they are neither legally mandated nor guaranteed to be paid to all employees. Once received, discretionary bonuses will be taxed as income under the Income Tax Act, 1961. Employers must be careful to properly document their bonus policies so there is less chance of future conflict regarding similar bonuses.