Discretionary bonuses, which are popular with many managers, are a bonus that employees can receive. The freedom given to employers to allocate them makes them a popular tool in many companies. However, employees describe the system as unfair and a source of tension between employees. Why should discretionary bonuses be abolished and what should replace them? Find out in this article.
What are discretionary bonuses?
The legal framework for discretionary bonuses is extremely flexible and they can be included in an informative clause in employment contracts or be granted spontaneously. The law does not require employers to justify either the amount or the criteria for awarding them.
As a bonus for achieving targets, they are sometimes used by companies to attract new recruits. However, although they may be included in an employment contract, there is no obligation for the employer to pay them to the employee once recruited.
Discretionary bonuses can also be used to reward performance when it is difficult to quantify. Some employers go so far as to replace increases in fixed salary, which are supposed to reward employees’ increased skills, with these “discretionary” bonuses.
In addition to the way in which they awarded, which entirely at the management’s discretion, the amount of discretionary bonuses can be partly pre-empted by managers, before the rest is distributed to the lucky employees.
A controversial and confusing bonus
The sheer subjectivity on which discretionary bonuses are based, and the abuse it can lead to, have earned them the nicknames “customer-based bonus” or “subjective bonus.” But these bonuses have other disadvantages for employees.
Instead of encouraging employees to improve their performance, discretionary bonuses encourage them to maintain a consensual relationship with their superiors. Employees are more concerned sbouy their relationship with their superiors than with their productivity. In addition to being counterproductive, this behaviour leads to unhealthy competition and creates a bad atmosphere among employees.
Discretionary bonuses can make managers feel omnipotent, confident that they can win the allegiance of their subordinates. They are unfair as they distract employees from their career path and skills development, and distract managers from their role of supporting employees.
Abolishing discretionary bonuses in favour of incentive compensation
Incentive compensation which makes sense is the type that rewards quantifiable performance, calculated on the basis of objective criteria. The possibility of obtaining a large gain, combined with the risk of receiving nothing in the event of failure, is what motivates employees.
This makes it relevant for employees, who can increase their income, and profitable for companies, which benefit from the efforts made by employees to earn it.
Moreover, incentive compensation does not create a feeling of injustice between employees. Since it encourages adherence to shared objectives and the search for excellence, it promotes fairness and group cohesion.
Finally, it cements the relationship of trust between managers and employees and helps create a healthy atmosphere in companies.
Virtually unlimited legal freedom, completely subjective awarding conditions and counterproductive performance for employees and their company are all reasons to abolish discretionary bonuses altogether. The best substitute for these controversial bonuses is undoubtedly incentive compensation, based on clear objectives, which motivates employees and is profitable for companies.
