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Discretionary bonus scheme – what is it?

Discretionary bonus scheme- what is it?
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Rewarding staff members with bonuses and incentives is a great way to encourage staff members to go the extra mile, push sales, and work to the best of their abilities. Not only does the employee benefit from the bonus, but it is very likely that your business will see an increase in performance levels, sales, and production.

A bonus is essentially an additional sum of money that is added to your employees’ standard salary. It is usually based on performance and meeting targets, but there are other types of bonuses that are paid annually, such as Christmas bonuses.

But what exactly does a ‘bonus’ entail? There are many different types of bonuses and bonus schemes in the UK. In this article, we will be focusing on discretionary bonuses, but also have a look at alternative bonus schemes and options so that you know what else may be available to you. If you are a business owner looking to implement a bonus scheme and are looking for the right bonus scheme for your organisation, this article could be invaluable to you.

What are discretionary bonus schemes?

When it comes to bonus schemes in the UK, there are two main types that business owners can make use of. These are discretionary and contractual bonuses. Contractual bonuses will lay out certain requirements for a bonus to be met in your employment contracts, and if an employee meets these requirements, you will have to pay out their bonus. Contractual bonuses give employees very clear expectations of how they can obtain bonuses and when they will be paid.

Discretionary bonuses are slightly different as they can be paid out at the business owner or manager’s discretion. There is no contractual obligation when it comes to discretionary bonuses, and they can be paid at any time. In the case of a discretionary bonus, employees are aware of the possibility of receiving a bonus, but they may not have specific expectations as discretionary bonuses often fluctuate in terms of amounts and timeframes.

Although discretionary bonuses are at the employer’s discretion, they usually do have some sort of structure in place to assist in determining when and how employees should be paid bonuses. Employee expectations should be managed as effectively as possible when it comes to discretionary bonuses.

Am I obliged to provide my staff members with bonuses?

Employment law states that you are not obligated to pay your staff any form of bonus. You need only ensure that their pay is in line with minimum wage requirements in the UK. That being said, bonuses, discretionary or other, do offer many benefits to both your business and your employees. The majority of businesses in the UK do offer some form of bonus to their team.

What are some of the benefits of discretionary bonuses?

If it is not a legal requirement to pay your employees an additional bonus on top of their salary, then why would you? Many business owners feel that the salary or wage that they pay their employees is enough and that paying them bonuses would be an unnecessary expense. But here are some of the benefits of having a bonus scheme in place:

  • Employee engagement- Employees immediately become more engaged and attentive when there are bonuses at stake. They may pay more attention to what is required of them, with fewer mistakes being made.
  • Attracting quality candidates- If you are a company that offers any sort of bonus scheme, you are going to attract high-quality candidates, and filling positions within your company will be a lot easier. Because your competitors most likely offer bonuses, you are able to ensure that quality candidates are still interested in working for you as opposed to your competitors.
  • Motivation- Bonus schemes breed motivation. And motivated employees help speed up production and increase performance and sales. Motivated employees are usually happy employees.
  • Employee retention- If you are offering your employees a bonus, you are more likely to retain your rewards and not have to deal with a high employee turnover which can be costly as well as admin heavy.

The above advantages apply to bonuses in general, but discretionary bonuses have their own set of advantages over contractual bonuses, including:

  • Flexibility- Discretionary bonus schemes give you the opportunity to change things up without making contractual changes. Contractual changes require a lot of admin and can be difficult to execute. You can create bonuses as please, as well as create changes to them as circumstances change.
  • Ability to pull back during financial hard times- If your business is struggling, you may want to pull back on some of your usual bonuses, and discretionary bonuses allow you to do that. Many organisations in the UK had to shift their bonus schemes because of the financial hardships caused by the covid-19 pandemic. Contractual bonuses would not have allowed employers to pull back on bonuses without major changes to all of their employees’ employment contracts.
  • No contractual bonds- Contractual bonus schemes can get you into a lot of trouble if you do not meet your employees’ bonus expectations. But with discretionary bonuses, there are far fewer legal issues, even though employees can still claim in certain situations.

What are some of the potential downfalls of discretionary bonuses?

If you’re operating using a discretionary bonus system, you need to ensure that you are consistent and fair. Bonuses that seem to favour certain staff members over others could lead to disgruntled staff members and water cooler gossip. This may seem relatively harmless, but it could cause you to lose valuable staff members in the long run.

Unlike contractual bonuses, staff members may not be 100% certain of what is required from them in order to obtain their bonus, and this may cause a dip in motivation levels. This is why it is important to be extremely communicative with regards to what staff members can do to give them the best chance of attaining bonuses. It is also important to continually motivate your staff and gain advice from your HR rep.

In the case of discretionary bonuses that become an expected tradition, such as Christmas bonuses, if you had to pull back from these, your staff members could still make a claim based on it being a custom or tradition.

Potential candidates may be turned off by the idea of discretionary bonuses and may rather apply at companies that offer guaranteed, contractual bonuses so that they can better manage their expectations and create more effective personal budgets.

Types of bonus plans

There are a few different types of bonus plans available, and the following can be contractual or discretionary:

  • Individual- An individual bonus is focused on the individual employee and is usually rewarded when employees meet individual targets set out for them by the employer.
  • Team- If you split your company into teams, you can create some healthy competition by rewarding teams with team bonuses. This may also encourage team building and communication skills for those who work in a team. Even those who may not care about individual gain may work harder as they don’t want to let their team members down.
  • Company- Company bonuses are company-wide and encourage all of your staff members to work as a cohesive team in order to reach company goals. Company-wide bonuses may also include non-performance bonuses such as Christmas bonuses etc.

What are some of the other bonus schemes?

Like we have already mentioned in this article, the main alternative to discretionary bonus schemes are contractual bonus schemes. Contractual bonus schemes outline all of the contractual terms of the bonus scheme in the employment contract so that employees know what to expect in terms of their bonus. They know what objectives have to be met in order to have their performance-based bonuses paid out, and they’ll know exactly when their Christmas bonuses etc., will be paid.

Many businesses actually make use of both contractual and discretionary bonuses in a way that is best suited to their business. It is often advantageous to use a mixture of these schemes as you are able to maintain flexibility while still providing your team with the security of contractual bonuses.

Popular bonuses

Some of the most popular bonuses that employers offer their staff include:

  • Christmas bonuses- We all know that Christmas can be a pretty costly time of the year, especially for parents. This is why Christmas bonuses have become somewhat of an age-old tradition in the UK. There are very few businesses that do not offer some sort of Christmas bonus, and this bonus is usually a standard amount for each employee, or it is a percentage of each employee’s salary.
  • Performance incentives- The other popular type of bonus would be a performance incentive. These usually work by setting certain goals in place for your employees. For example, if an employee makes x amount of sales, they receive a bonus to the value of x etc. Performance incentives are very popular as they encourage employees to push sales and do their jobs to the best of their abilities.
  • Employee of the month- to breed a bit of healthy competition, many businesses offer a special bonus (often discretionary) to the employee that does the best each month. The criteria for deciding this will differ greatly from business to business.
  • Objective bonuses- If you need your business to reach short term goals quickly, you can put objective bonuses in place and reward your staff once these bonuses are reached.
  • Birthday bonuses- Birthday bonuses are not as popular as they once were, but many companies still offer their employees a bonus in the month of their business as a birthday gift to them and to show their appreciation.

What is the job retention bonus?

In the UK, we have a bonus scheme called the job retention scheme. This is not the same as your company’s bonus scheme as it is run by the UK government. The government created this incentive, especially for companies that make use of the Furlough Scheme and the Job Retention Scheme. If you are a part of these schemes, you’ll receive £1,000 per employee that you retain.

Considerations when deciding on a bonus scheme

If you are looking to implement a bonus scheme, but your company is currently struggling, you may want to reconsider. You don’t want to start implementing bonuses and then have to pull back after a few months because you can no longer afford them. Your business should be in a financially comfortable position before you start implementing a bonus scheme.

The next consideration that you’ll need to think about is what bonus scheme is best suited to your company. In this article, we have provided you with some valuable information about both discretionary and contractual bonus schemes.

Another consideration that you should think about is tax. Bonuses are considered the same as regular pay according to the HMRC, so when doing your accounting, you should add the employee bonus and usual salary together to form one amount before deducting PAYE, NIC etc.

You may also want to consider creating different bonus levels so if an employee misses out on a certain bracket. They still have the opportunity to receive another type of bonus. This also creates more opportunities for growth within your company. The structure of your bonuses should be very carefully considered.

The other thing you need to consider is the monetary value of the bonuses you wish to offer. You need to be able to factor these bonuses into your monthly budget and ensure that they are worth it if they are performance-based bonuses.

If you’re uncertain as to what type of bonus scheme will work best for you and your organisation, you may want to look into getting expert advice from a financial advisor or HR consultant. If you are a new business owner, some of these concepts can feel very foreign to you, and an expert’s professional advice would prove to be exceptionally valuable.

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