When contemplating providing a one-time bonus or implementing a bonus program, the first thing to consider is whether bonuses align with your goals and company culture.

If you decide that they do, there are many things to consider, such as frequency, timing of distribution, criteria for attainment, taxes, and impact on wages. For example:

• Will this be a one-time bonus, or will it be an ongoing bonus policy or plan so that employees will expect it?
• Are any criteria tied to receiving the bonus, such as attendance, sales or production quotas, or company performance?
• Will the bonus affect employees’ regular rate of pay (RROP)?
• Will giving a bonus impact your ability to provide yearly pay increases?

Discretionary Versus Nondiscretionary

Generally, bonuses are categorized as discretionary or nondiscretionary. When an employer gives a discretionary bonus, it means they retain discretion as to both the timing and amount of payment. The amount of a discretionary bonus is determined by the employer without prior promise or agreement with employees. An example is a surprise holiday bonus.

On the other hand, if an employee is expecting a bonus or working towards it under a plan or company policy, it’s typically nondiscretionary. Nondiscretionary bonuses are generally given based on predetermined parameters, usually by company policy or practice. Examples include bonuses based on a formula, such as individual or group production bonuses, bonuses for quality and accuracy of work, retention bonuses, and attendance bonuses.

A good rule of thumb is to look at the expectation. If you have created an expectation among your employees for the payment of a bonus, it’s most likely nondiscretionary.

Bonus Impact on RROP

When a nonexempt employee receives a nondiscretionary bonus, it must be factored into the employee’s RROP when calculating overtime. If the bonus is earned in the same workweek as overtime, the employer must recalculate the RROP to properly determine the overtime premium. For more information concerning RROP and bonuses for nonexempt employees, see the Fact Sheet #56C: Bonuses under the Fair Labor Standards Act (FLSA).

Bonus Versus Pay Increase

Both pay increases and bonuses can be part of the company’s total compensation plan, and there are pros and cons to each. In selecting which to use, or whether to use both, consider the purpose of any compensation change, the effect it will have on employees’ base salary, the company’s financial needs, and how it will be perceived by employees.

Pay raises can have a positive impact by keeping salaries in line with what competitors are offering and providing adjustments for costs of living. Generally, they are also more valued by employees because they provide consistent income and financial security. On the other hand, salary increases may result in inflated salaries over time (especially for employees with more seniority), are difficult to take back (even during an economic downturn), and are an ongoing expense rather than a flexible one.

Bonuses allow the company to incentivize certain behaviors or outcomes and to change the incentivized behavior or outcome from one bonus period to the next. Giving bonuses also allows the company to emphasize a “total team effort” by conditioning it not just on individual goals but also the company’s overall financial performance. From a “bottom line” perspective, bonus programs may allow you to provide extra money when extra money is available, without committing to long-term increases in base pay.

Potential drawbacks of giving bonuses include employee expectations that they will be as big or bigger than the year before. They are also taxed at a higher rate than regular wages, which is a common point of shock and complaint for employees. And, perhaps most importantly, bonus programs can take a significant amount of time to administer, particularly if your payouts are based on multiple factors or vary between employees.

Align Your Bonus Strategy with Compliance, Culture, and Growth

Creating a bonus program that motivates employees, supports your company culture, and stays compliant with employment laws is no small task. From choosing the right structure to navigating tax implications and wage impacts, there’s a lot to consider. That’s where a trusted PEO like Emplova can make a big difference. We help businesses like yours build smart, sustainable compensation strategies—so you can reward your team with confidence and clarity. If you’re thinking about bonuses, we’re here to help you think it through.

Emplova is a unique Professional Employer Organization (PEO) that helps small to medium sized businesses grow and prosper by providing benefits, payroll, technology, compliance, and HR administration. To learn how we can create a winning HR strategy for your business contact us today