Non-Discretionary and Discretionary Bonus Schemes
By and large, bonus schemes will fall into two brackets. Non-discretionary, where bonuses are based on a defined performance criterion with the entitlement likely to be written into the employment contract, and discretionary, where bonuses are paid at the discretion of the employer with no pre-defined criteria or contractual obligation.
Non-discretionary bonuses are likely to be offered to sales departments that work on commission. This means that, for example, a salesperson will have a defined performance criterion, such as hitting a sales target, in order to trigger a bonus payment. As the employee knows how they need to perform to receive the bonus, this acts as an incentive to meet their target.
However, from the business point of view, it is important to note that – depending on the written agreement – this may mean that you are legally obligated to pay the bonus regardless of the company’s overall financial position. Therefore, if the business’ finances are already under strain, the agreed bonus must still be honoured.
In the case of discretionary bonuses, there is much more of a grey area as such entitlements will not be written into an employment contract and nor is there concrete criteria for which the bonus is triggered. This effectively means that the power is with the business to pick and choose when and how to offer such bonuses, but employees must trust they will receive a bonus for good performance. If staff fail to see the business follow through on such promises, the attractiveness of the incentive begins to fade away and employees’ motivation and productivity is likely to dwindle.