Fundamental Payroll Certification (FPC) Practice Exam

What is a discretionary bonus?

1. A bonus promised in advance

2. A bonus paid for services without prior agreement

3. A mandatory end-of-year bonus

4. A bonus paid to all employees regardless of performance

The correct answer is: A bonus paid for services without prior agreement

A discretionary bonus refers to a payment made by an employer that is not guaranteed and is typically given at the employer's discretion, often as a reward for exceptional performance or company profitability. This type of bonus is made without a prior agreement with employees, meaning it is not based on any contractual obligation or set criteria that would necessitate the payment. Instead, it reflects the employer's recognition of an employee's efforts or the organization’s overall success. The other choices highlight concepts related to bonuses but do not fit the definition of a discretionary bonus. A bonus promised in advance would imply there was an agreement outlining the payment, making it not discretionary. A mandatory end-of-year bonus suggests that there is an obligation to pay it, which again contrasts with the discretionary nature. Finally, a bonus paid to all employees regardless of performance would imply a predetermined aspect rather than the subjective decision-making inherent in discretionary bonuses.