According to the French dictionary publisher Larousse, a discretionary power is “unlimited, arbitrary and exercised without being subject to a higher authority.” Leaving decision-making to somebody’s “discretion” means they are given the power to decide. This concept applies to so-called discretionary bonuses.
Discretionary bonuses are offered, to at least some employees, in over 80% of French companies.
It is a form of incentive compensation paid to employees and dependent exclusively on a managerial decision. To what extent can a bonus be considered discretionary? What are the advantages and disadvantages of this practice? How do discretionary bonuses change management?
What is a discretionary bonus?
“Discretionary bonus,” “managerial bonus,” “quality bonus,” “bonus at the manager’s discretion,” “office budget:” discretionary bonuses can have different names within companies but are always based on the same principle: they are allocated and calculated based on a manager’s decision alone.
Many employees have been confronted with this and often refer to it as the “subjective bonus” or the “client’s bonus.”
In some sectors, this bonus is more pernicious, earning it the name “pirate bonus” The manager has a budget, he pre-empts his share and then reallocates the rest to his teams. Did you say pirate?
What are the reasons why you might want to introduce discretionary bonuses?
To make a salary more attractive while still complying with employment law
To convince a new recruit to join you, an attractive salary is an undeniable asset. Some employers are therefore tempted to use the legal flexibility provided by discretionary bonuses. Indeed, they are a way for employers to put forward a higher salary while giving themselves the right not to pay them to their staff. As such, the possibility of receiving a discretionary bonus can be written into the employment contract, which does not oblige employers to actually pay them. It is easier to award a bonus that is not binding than to increase a fixed salary or to improve a transparent incentive compensation system.
When performance cannot be measured
In some cases it is difficult to measure and spell out performance – for good reason. If we take the example of support functions, it is sometimes difficult or even impossible to measure an employee’s performance accurately. How can you measure it if you don’t have any factual, quantifiable elements that allow you to concretely evaluate your activity? In this particular case, an employer may see the introduction of a discretionary bonus as a way of assessing performance without having all the indicators for objective measurement.
It is important to remember that this type of bonus is often introduced to compensate for insufficient increases in fixed salaries, which are supposed to reward an increase in employees’ skills.
When shouldn’t you introduce discretionary bonuses?
They prevent an employee from evaluating themself
Increasing motivation through incentive compensation in an individual results from the “tension in the pay system.” This tension is essentially due to the possibility of earning a large amount combined with the risk of losing out.
For the system to be effective, the employee must be able to anticipate their individual performance. They must know precisely what the results will be in terms of the nature of the efforts made and how they will be translated into the achievement of set targets and the bonus amount. However, in a discretionary bonus system, the employee will have to make an effort without knowing whether they will be paid, which is counterproductive and not very motivating.
Subjectivity and, above all, differences in the level of requirements between managers cannot guarantee a fair or unbiased system
As the awarding of the bonus depends solely on the manager’s will and judgement, employees may feel obliged to maintain a strictly consensual relationship with their line manager to obtain it. This “obligation” is not always a guarantee of better efficiency within the company.
A recent study conducted by an office supplies company and reported by the French news channel LCI asked French employees who their worst work colleagues were. Twenty-one per cent of them condemned the attitude of “fake nice guys,” 20 per cent the profiles of “fake workers” and more than 12 per cent the profiles of “bootlickers.” The study concludes that “the good show these colleagues put on is annoying and prevents healthy professional relations.”
Furthermore, it is reasonable to ask how subjective the manager’s decisions are
employees, as managers provide no explanations for how they are allocated?
Managing through discretionary bonuses is inefficient and even counterproductive
The desire to earn more is a powerful motivator. However, a manager who bases their management solely on the allocation of this bonus would run a considerable risk of demotivating their teams.
In the course of hundreds of assignments conducted over the last 25 years, Primeum has observed that many managers are still opposed to scrapping these discretionary bonuses. But why? What source of power do they derive from them? How are they used as a means of pressure on teams? Why are they sometimes used as a lever to foster the allegiance of their employees?
What they need is adherence to shared targets, not allegiance to themselves. It is the sense of meaning and requirements that teams can benefit from to seek excellence and rewards for achieving explicit targets. It is up to managers to take a supportive approach to success by showing their teams how to perform well
