Discretionary Bonus Schemes

Employers and their employees know what a bonus is. It’s adds value...
  • Author: Siva
  • Last updated: November 10, 2022
  • 5 Minutes
discretionary bonus schemes and policy for small and medium businesses in UK explained by Papershift

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Employers and their employees know what a bonus is. It’s adds value to an employee’s wages while giving employers the opportunity to reward staff for their hard work. Still, there are sometimes misunderstandings that can lead to animosity in the workplace. 

This guide will describe what a discretionary bonus scheme is and will aim to assist both employers and employee with understanding them better.

Let’s begin

What does a discretionary bonus scheme mean?

A bonus is extra pay that a company agrees to provide to an employee. A discretionary bonus can be for specific or unexpected situations and are not part of the employee’s contractual monthly amount.

An employee should not see the payment of a bonus as a guarantee of a future bonus unless it is stated or implied in their contract. If the bonus is written into the contract, it stops being discretionary and becomes a contractual bonus.

Discretionary bonusses are typically awarded for exceptional performance, contribution, or accomplishment that goes beyond the employee’s scope of duties.

As an employer am I obliged by law to give a discretionary bonus?

By their very nature, employers are not obliged to give discretionary bonusses by law. Companies that have chosen to give discretionary bonuses in the past are not legally bound to do so in the future. There are, however, a few caveats (see later).

How does a discretionary bonus scheme work?

A discretionary bonus is compensation given to staff members based purely on the employer’s logical discretion. The size of the bonus, why it is awarded, and when it will be awarded are decided by the employer and don’t necessarily have to be made known in advance. As such, discretionary bonusses can take many forms and be administered in many ways.

Discretionary bonusses might be given for the following reasons:

  1. An employee completing exemplary work
  2. An employee working above and beyond their normal role
  3. The business making better than expected profits

And they might be given in the following ways:

  1. As a percentage of the employee’s salary
  2. A flat payment (lump-sum payment)
  3. A percentage of sales
  4. A commission
  5. A share option
  6. A voucher for a shop or other experience
  7. A gift item

Do I have to pay a bonus if I have a discretionary bonus scheme?

The “discretion” in the phrase discretionary bonus is exactly what it means, that the bonus is discretionary. There are, however, a few things that business owners need to be aware of. There are many records of negative outcomes for business owners at employment tribunals where the courts have ruled in favour of employees who have been refused a discretionary bonus. Court documents show that discretion comes with some strict ethical, humane, and logical parameters and principles.

Some of the parameters and principles a business must meet with discretionary bonus schemes are:

  1. As a business owner, you are required to act in good faith. This means that if you have said you will offer the bonus based on specific targets, you must follow through on your promise if the targets are met.
  2. Discretion must be exercised honestly. For example, you cannot change goalposts once the bonus has been offered or treat staff differently.

The way that the courts look at discretion in respect to discretionary bonusses is as follows:

  1. The trust and confidence that is stated explicitly, or in spirit, within every contract of employment must not be breached.
  2. Employees must be treated in an unbiased, equitable fashion. This means that you cannot favour one group of employees over another.
  3. Employers are required to qualify the reasoning behind their decision when deciding to pay, or not pay, a bonus even if it is discretionary.

The long and short of this is that while discretionary bonusses are optional for employers, if they are offered to staff, they must be administered fairly and in good spirit.

How do I avoid legal issues with bonusses as a business owner?

Before you cancel all your bonus schemes out of fear of legal action, here are some helpful hints to reduce bonus related risks:

  1. Ensure that all employee contracts include a clear point stating that any bonusses offered are at the employer’s absolute discretion. This helps avoid turning a discretional bonus into a contractual right.
  2. The employment contract wording should include clear statements around how discretionary bonusses will be paid when a staff member leaves the business. 

But the biggest tip we can give to avoid legal issues with bonusses is for businesses to stick to their work. If you’ve offered a discretionary bonus scheme, make sure you follow through on it to all employees who qualify.

What are the benefits of discretionary bonuses?

Here are some of the benefits of having a discretionary bonus scheme in place:

  1. Employee engagement. Employees become more engaged and attentive when there are bonuses at stake. 
  2. Attracting better quality job candidates. If you are a company that offers a bonus scheme, you are going to attract high-quality candidates, and filling positions within your company will be a lot easier. 
  3. Better motivation. Bonus schemes breed motivation. And motivated employees help speed up production and increase performance and sales. 
  4. Better employee retention. If you are offering your employees a bonus, you are more likely to retain your staff.
  5. Discretionary bonusses are flexible (as opposed to contractual bonusses). Discretionary bonus schemes give you the opportunity to change things up without making contractual changes. 
  6. Ability to pull back on bonusses during financially difficult times. If your business is struggling, you may want to pull back on some of your usual bonuses, and discretionary bonuses allow you to do that. 
  7. No contractual obligations. Contractual bonus schemes can get you into a lot of trouble if you do not meet your employees’ bonus expectations. But with discretionary bonuses, there are fewer legal issues, even though employees can still claim in certain situations.

In conclusion

Discretionary bonus schemes can be vital for many businesses to keep their workforce motivated and happy. But it’s a fine line between having a great bonus scheme and one that is expensive and ineffective.

We hope you’ve enjoyed this guide. For more useful workplace information, check out the rest of our website.

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Written by Siva

I write & describe the value & benefits delivered by Paperhift's rota planning, staff time tracking, and employee payroll management software. Especially useful for Shift Planners, Rota Managers, Team Admins, and HR Teams :-)