Are you constrained to say bonus is discretionary?

SQ - Are you constrained to say bonus is discretionary

One of my recent posts covered the pros and cons of keeping compensation information confidential. There are positives to each side of the coin, but my view is that we should communicate as much as possible when it comes to Compensation and Benefits rules, entitlements and required contributions. There are too many drawbacks to not explaining, and too many advantages to being open and transparent.

There was one question raised to me though : how do you communicate about incentives and bonuses if your Legal department does not want you to include anything in the contracts of employees except “bonus is discretionary, not guaranteed, based on Board final decision and we can’t share with you any rules or commit to any number” ?

… even if there are, in fact, some rules… including one that says that the company or Board reserves the right to not pay anything.

Yet you have to sustain employee engagement and foster a culture of performance.

You also need to be proactive in terms of recruitment and new hire package construction : if you say the bonus is totally discretionary, and you can’t communicate any rules around it in writing or give out any numbers, then the credibility of this bonus or incentive goes out of the window and the candidates will try to negotiate higher basic and allowances in order to compensate for the perceived lack of security on the variable part of their future compensation.

Well, in that case, there are a number of things you can do to try and create as much value and credibility as possible for your scheme, even if you never communicate its rules in writing (therefore with no potential legal liability).

The first one is to give a nominal value to the incentive.

That is, you explain what could be a potential payout in “normal” circumstances (ie a target amount if there are rules of pay-for-performance) or an average payment from previous years (if the bonus is fully discretionary). This gives employees and candidates a sense of what they may receive, and reduces the anxiety related to the unknown. They can start to plan and project themselves if they want to.

The second one is to explain how the incentive is calculated.

You create fake amounts for demonstration purposes, change multipliers, percentages and weights. You clearly explain that the numbers are not real, and that you will demonstrate the principles by which the incentive allocation is made. Then you describe how amounts are determined and you answer all questions in honesty, but based on your theoretical numbers. You can do this through an all employee meeting, or a “roadshow” where you deliver the explanations in department meetings. Understanding the rules gives a feeling of security to your employees, even if you don’t distribute anything in writing.

The third thing you can do is give thorough explanations to managers and the HR community.

This way they can act as reliable relays of information about the incentive. The education you provide them should revolve around why and some form of reinforcement of the message around the purpose of the incentive, as well as the principles of calculation that you already explained to the employees. It is important that they convey a consistent message, especially as nothing is put in writing.

Having full rules of engagement is of course the best in terms of motivation, transparency and employee engagement.  However, consistent, clear communication on the how and the process of the incentive will help you and your organisation get through when you are constrained to not commit to any rules or numbers in writing.

What other tips can you share if you are in the situation of not being allowed to explain anything about your incentives in writing ? Please share your tips in the comments section !


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  1. […] are very US-centric and their legal (or even cultural) aspects  may not apply to your country).  I recently addressed a similar topic and gave out some suggestions on how to establish or maintain the engagement and trust of employees […]

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