AEC Bonus Structures: Understanding Discretionary vs. Non-Discretionary
As architecture, engineering, and consulting firms move into the new year, many are reviewing compensation strategies, evaluating prior-year outcomes, and planning incentives for the months ahead.
One area that continues to cause confusion is the distinction between discretionary and non-discretionary bonuses, and the payroll, overtime, and compliance implications tied to each. Understanding how bonuses are classified is critical, particularly as firms aim to reward performance while remaining compliant with labor and regulatory requirements.
Before determining how bonuses should be structured, it’s important to clearly understand the difference between discretionary and non-discretionary bonuses under the Fair Labor Standards Act (FLSA).
Discretionary
A company has the sole discretion to determine if, when, and the amount a bonus will be paid, so long as it is not connected to a contract, agreement, or promise. Examples include holiday bonus, severance pay, referral bonus, spot bonus for overcoming a challenging or stressful situation, etc. (Fact Sheet #56C: Bonuses under the Fair Labor Standards Act (FLSA) U.S. Department of Labor). Discretionary bonuses do not need to be included in the regular rate of pay (the rate that is used to calculate overtime).
Non-Discretionary
While discretionary bonuses offer employers flexibility, many commonly used incentive programs fall into the non-discretionary category and carry different payroll and overtime implications.
A non-discretionary bonus is based on a predetermined formula and is included in a contract, agreement, incentive plan, and/or promised to an employee (in writing or verbally). Examples include bonuses for quality and accuracy of work, incentivizing efficiency, attendance bonus, safety bonus, etc. (Fact Sheet #56C: Bonuses under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor). Non-discretionary bonuses do need to be included in the regular rate of pay. The Department of Labor’s Fact Sheet #56C includes an example of how to calculate the regular rate of pay and the additional overtime pay that may be due.
Is Your Compensation Strategy Data-Driven?
Developing a compliant, non-discretionary bonus structure requires reliable benchmarking. The 2026 Salary Report of AEC Firms provides the definitive data you need to optimize your strategy with confidence.
📊 Comprehensive Data: 29,000 compensation records from 321 firms.
📍 Region-Specific: Broken down by state, region, and firm size.
🏗️ Industry Standard: Covers Architecture, Engineering, CM, and more.
📈 Trend Insights: Compare annual changes across every position.
Failure to treat bonuses correctly can lead to penalties and interest if audited by the DOL.
FAR Regulation
Beyond wage and hour considerations, bonus classifications can have additional implications for firms that perform government contract work.
If your firm works on government contracts, a non-discretionary bonus can be included in the Overhead Rate calculation so long as “awards are paid or accrued under an agreement entered into good faith between the contractor and the employee before services are rendered or pursuant to an established plan or policy followed by the contractor consistently as to imply, in effect, an agreement to make such payment. Understanding how these costs impact your firm’s financial standing is a core part of our Government Contracting advisory services.
There are only a limited number of discretionary bonuses considered allowable, including a referral bonus, spot bonus, anniversary/achievement bonus, hiring/sign-on bonus, retention bonus, and a bonus for passing an exam. All other discretionary bonuses are not considered allowable. This may drive or limit the types of bonuses your firm offers, and understanding each organization’s expectations from a payroll, tax, and regulatory perspective is critical.
Many people I talk with say their firm offers an annual bonus that does not drive results and is usually paid in a way similar to previous years. It could be advantageous to reimagine your bonus this year, especially if you do government contract work, as it could help your overhead rate. If you have the flexibility to choose, I still encourage a non-discretionary bonus so that there are objectives (a small amount of subjectivity) aligned with strategic initiatives. If you are a company with a few hourly employees, the impact of shifting to a non-discretionary bonus is lower unless those individuals work a lot of overtime, which could create an administrative burden.
Next Steps
We will touch on these considerations in more detail during our upcoming webinar on compensation, where we will help AEC firms navigate the complexities of paying people in a way that aligns with business objectives while remaining compliant.
