Drafting a discretionary bonus scheme: top tips for HR

Discretionary bonus schemes can boost motivation and performance, but if the rules aren’t clearly set out, they can quickly lead to disputes, costly claims and employee frustration. The key is balancing flexibility with clarity. If you are thinking of introducing a new bonus scheme or reviewing the existing terms, please consider our tips below and contact our team who would be pleased to assist you: 

Be clear on how discretion works

Leaving bonus decisions entirely open may seem appealing, but it increases the risk of allegations of unfairness or bias. A better approach is to outline the broad factors that may be considered - such as company, individual and team performance - while still keeping a general discretion overall.

Joining and leaving mid-year

Eligibility is often where problems arise and considering any pro-rata options at the outset is useful. For new starters, options include:

• excluding them until the next bonus year
• allowing immediate entry with pro-rating
• linking eligibility to successful probation

Whichever approach you take, make it crystal clear. 

The same applies when any employees leave part-way through a bonus year. Employers can exclude leavers altogether, offer pro-rata payments only for “no-fault” departures (such as redundancy or ill-health), or pay pro-rata bonuses to all. The Clark v Nomura case shows the danger of vague drafting: without clear wording, the employer was forced to pay a full bonus even after the employee resigned!

Other circumstances to consider

Think beyond starters and leavers. Do you want the ability to withhold or defer payment where an employee is suspended or under investigation? In some sectors, investigations can take months, so having this option can be crucial.

Get the basics right

Make sure your bonus scheme clearly details:

• the bonus year dates
• when entitlement is lost (e.g. on giving notice or on termination)

Ambiguity in either area invites challenge.

Clawback and deferral

Clawback provisions can protect the business where a bonus has been paid but later needs to be recovered. To maximise enforceability, include clawback wording in employment contracts and ensure employees agree to the terms. Deferring bonus payments over time can also provide more control.

Conclusion 

A well-designed bonus scheme doesn’t need to be horribly complex - just clear. Thoughtful drafting, defined rules, and careful documentation give employers flexibility while reducing the risk of disputes and claims. 

For advice and support relating to the issues raised in this blog or to make an appointment with our Employment Law Team please call 01635 896 336 or email employment@fentonelliott.co.uk

Disclaimer: This summary is for general awareness and insight, not legal or professional advice and readers should seek professional advice for their situation.