How to draft a discretionary bonus scheme

Discretionary bonus schemes can boost motivation and performance, but if the rules aren’t clear, they can quickly lead to disputes, costly claims and employee frustration. The key is balancing flexibility with clarity. Thoughtful drafting, defined rules, and careful documentation can give you flexibility while reducing the risk of disputes and claims.

Be clear how decisions will be made

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 discretion overall.

Get the basics right

Make sure your scheme clearly sets out:

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

Ambiguity in either area invites challenge.Joining and leaving mid-year

Eligibility is often where problems arise. 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 explicit.

The same applies when employees leave part-way through a bonus year. Employers can exclude leavers altogether, offer pro-rata payments only for “no-fault” departures (e.g. 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 scheme clearly sets out:

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.

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.

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

Further reading

• An employer’s guide to bonuses during maternity leave
• Entitlement to a bonus – Bonuses – Acas

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