Discretionary Bonus

Three things get called bonus and they behave differently.

The middle row is where most confusion sits. A payment described as a discretionary bonus, but calculated against a target that was communicated in advance and paid whenever the target is met, is not discretionary in any meaningful sense. It is variable pay, and the discretion exists only in the wording.

The distinction is worth keeping because it determines what an employee can reasonably expect and what the employer can change without consequence. An organisation that runs variable pay and calls it discretionary gets the administrative burden of one and the credibility of neither.

Whatever an employer's bonus policy says, statutory bonus under the Code on Wages, 2019 is not discretionary where it applies.

It applies, under section 41(2), to an establishment in which twenty or more persons are employed or were employed on any day during the accounting year. Within such an establishment, section 26 makes bonus payable to an employee drawing wages not exceeding an amount determined by notification who has put in at least thirty days of work in the accounting year.

Two further provisions constrain the employer. Section 39 requires bonus to be credited to the employee's bank account within eight months of the close of the accounting year, with extension possible on the employer's application for sufficient reasons. And section 60 makes any agreement relinquishing the right to bonus null and void so far as it reduces the liability.

The Code does allow the discretion to disappear in one direction. Section 29 disqualifies an employee from receiving bonus where they are dismissed from service for fraud, for riotous or violent behaviour while on the premises, or for theft, misappropriation or sabotage of property. That is a statutory disqualification rather than an exercise of employer judgement, and it depends on dismissal for those causes rather than on the conduct alone.

Anything the employer pays beyond the statutory position can be discretionary. The statutory floor itself cannot.

Discretion that is never exercised stops being discretion, and this happens gradually enough that employers rarely notice the point at which it went.

• Paying at the same time every year, so the timing becomes expected.
• Using the same formula each time, so the amount becomes predictable.
• Paying every eligible employee every year, so non-payment would be an event requiring explanation.
• Describing it in recruitment or in offer letters as though it forms part of the package.
• Communicating an indicative figure in advance, which is the fastest route from discretion to expectation.

The last is worth dwelling on. Once an employee has been told a number, a caveat that it remains discretionary does very little work. They have planned around it, and withdrawing it will be experienced as a reduction rather than as a decision not to make a gift.

Where an employer genuinely wants to retain discretion, the way to do it is to exercise it: vary the basis, vary the timing, state the reasoning each time, and be willing not to pay in a year that warrants not paying. An employer unwilling to do any of those is running a variable pay scheme and should say so.

The other cost of discretion is that it is exercised by individuals, and individuals vary.

Where managers allocate a pool with no framework, the outcomes reflect the managers as much as the performance: some spread it evenly, some concentrate it, some reward visibility, some reward the people who asked. Two employees doing comparable work in different teams receive materially different amounts for reasons neither can discover.

This is worth measuring rather than assuming. The distribution of discretionary awards by team, by manager, by grade and by group is usually more uneven than anyone expects, and where the unevenness tracks a protected characteristic it is a real exposure rather than an untidiness.

Structuring the discretion does not remove it. A stated pool, a small number of criteria, a moderation step across managers and a recorded reason for each award leave the judgement intact while making it defensible. The alternative is a scheme whose outcomes cannot be explained, which is uncomfortable to defend and easy to challenge.

Where equal pay considerations arise, note that the Code on Wages prohibits discrimination on the ground of gender in matters relating to wages for the same work or work of a similar nature, and that section 2(v) defines what same or similar work means by reference to skill, effort, experience and responsibility.

Most of the practical difficulty is in what gets said.

Useful communication explains the basis on which the employer will think about the payment, without committing to an outcome: what the organisation takes into account, roughly when the decision is made, and that a decision not to pay is possible. That gives employees something to understand without giving them something to rely on.

Unhelpful communication does the opposite, usually in the form of a percentage mentioned at offer stage, a target circulated at the start of the year, or a figure described as indicative. Each of these creates an expectation the employer will then either honour, in which case it was not discretionary, or disappoint, in which case the discretion cost more than it saved.

Offer letters deserve particular care, because that is where a discretionary amount most often gets described as part of a package total. Where a candidate is comparing offers on a headline figure that includes a discretionary bonus, they are comparing a number the employer has not promised, and the first year is where that is discovered.

The cleanest position is to quote fixed pay as fixed, describe variable pay with its conditions, and describe discretionary amounts as discretionary without a number attached.