Discretionary bonus

Businesses are constantly looking for ways to motivate teams, reward high performance, and retain top talent. One common strategy is the use of bonuses, but not all bonuses are created equal.

Among the many types, the discretionary bonus stands out for its flexibility, informality, and its ability to build goodwill when used thoughtfully.

What Is a Discretionary Bonus?

A discretionary bonus is a voluntary, non-contractual payment given by an employer to an employee. It’s typically not tied to a formal metric or obligation and is awarded at the sole discretion of the company, meaning the employer decides whether to give it, when to give it, and how much to give.

It’s often used as a gesture of appreciation or reward for overall performance, rather than a response to a specific goal.

It’s not promised, expected, or based on a contractual agreement. These bonuses are flexible, informal, and unpredictable. That unpredictability is what makes them non-binding, but also what can create confusion if not communicated clearly.

Discretionary Bonus vs Non-Discretionary Bonus

FeatureDiscretionary BonusNon-Discretionary BonusIs it required?NoYes, if outlined in a contract or policyBased on performance?Sometimes, but not promisedAlwaysLegally binding?NoYesIncluded in wage calculations?Usually notYes (e.g., for overtime or gratuity)Can employees demand it?NoYes, if conditions are met

Types of Discretionary Bonus

Discretionary bonuses come in many forms. Here are the most common types:

1. Annual Discretionary Bonus

Typically paid at year-end to thank employees for overall contribution. It’s not tied to specific KPIs or quotas and is often based on the company’s financial performance.

2. Spot Bonus

A one-time bonus given for immediate recognition such as helping close a major deal, managing a crisis, or going above and beyond unexpectedly.

3. Holiday or Festival Bonus

Common in the UAE during occasions like Eid, Diwali, or Christmas. It’s discretionary unless stated otherwise in the employment agreement.

4. Retention Bonus (Discretionary)

Offered to retain key employees during uncertain times like mergers, transitions, or high turnover.

Discretionary Bonus vs Performance Discretionary Bonus

There’s a subtle but important difference between a pure discretionary bonus and a performance discretionary bonus.

Note: If given consistently over time, even performance-based discretionary bonuses can begin to feel expected, potentially turning into non-discretionary bonuses from a legal or compliance standpoint.

Discretionary Bonus Examples

• A Dubai-based company gives a surprise AED 3,000 bonus to all employees for helping achieve company-wide revenue milestones.
• A manager awards a spot bonus to a junior employee who stepped up during a crisis when the team was short-staffed.
• An Emirati-owned business distributes holiday bonuses during Eid as a gesture of goodwill—without any prior announcement or criteria.

Non-Discretionary Bonus Examples

• A 10% quarterly performance bonus tied to achieving sales targets.
• AED 2,000 monthly attendance bonus stated clearly in the employment contract.
• Commission paid to sales staff based on a published incentive structure.

These bonuses are clearly promised and cannot be skipped or withheld arbitrarily.

How to Calculate Discretionary Bonuses

Since discretionary bonuses don’t follow a formula, HR teams or leadership decide based on:

• Flat amounts (e.g. AED 2,000 per employee)
• Percentage of base salary (e.g. 10% of annual salary)
• Tiered bonus structure (e.g. Senior staff = AED 10,000, Mid-level = AED 5,000)

Example:

If your company had an exceptional year and allocated AED 500,000 for discretionary bonuses: You may split it by department, performance tier, or role level.

But remember, it must not create an expectation unless you plan to formalize it.

What HR Should Consider When Developing a Discretionary Bonus Policy

Even though the bonus is "discretionary", it’s important to document a clear internal policy for consistency, fairness, and compliance.

Key considerations:

1. Define it clearly

State in the employee handbook that the company may offer bonuses at its discretion and that they are not guaranteed or contractual.

2. Avoid creating unintended patterns

If you give bonuses consistently every year, it could lead to employee entitlement or even legal interpretation as non-discretionary.

3. Budget wisely Plan a discretionary bonus pool in the annual HR budget to avoid financial strain.

4. Be transparent and fair

Avoid favoritism. Use consistent, unbiased reasoning especially in diverse teams.

5. Consider legal implications (UAE-specific) Discretionary bonuses don’t need to be included in gratuity or end-of-service calculations, but if they become regular, courts may treat them as part of basic compensation.

UAE-Specific Notes on Discretionary Bonuses

Labour law in the UAE doesn’t mandate discretionary bonuses, but companies can choose to offer them.

Ensure any communication (email, policy, or contract) avoids implying guarantee or entitlement. Avoid referencing discretionary bonuses as part of “total fixed compensation” unless you’re willing to include them in end-of-service benefit calculations.

Final Thoughts

Discretionary bonuses are a powerful motivational tool. When used wisely, they boost morale, reward loyalty, and reinforce a performance-driven culture, without the legal or financial obligations of fixed bonuses.

But to get it right, employers must balance flexibility with fairness, documentation, and clear communication.

Whether you’re a small business in Dubai or a multinational with teams across the GCC, a well-structured bonus policy can help you attract and retain talent, improve engagement, and strengthen your employer brand.

FAQs About Discretionary Bonuses

1. Are discretionary bonuses taxable in the UAE?

There’s no personal income tax in the UAE, but bonuses are considered part of gross pay and may affect end-of-service calculations if paid regularly.

2. Can I include discretionary bonuses in the employment contract?

You can mention that bonuses “may be awarded at the employer’s discretion,” but avoid specific amounts or conditions to retain flexibility.

3. Do discretionary bonuses count toward overtime pay or gratuity?

Generally, no. But if they are paid regularly and predictably, they could be viewed as part of basic wage in court rulings.

4. Can an employee sue for a discretionary bonus?

No, unless the bonus was promised in writing or paid consistently without clear terms.

5. How can I make discretionary bonuses feel fair?

Use transparent, internal criteria even if informal. Communicate the reasons behind the bonus (e.g., company performance, employee initiative).