What does ‘discretionary’ mean?

If a bonus is fully, absolutely or wholly discretionary then on the face of it (see below) the employer will have freedom to choose whether to pay a bonus and, if so, what amount. If it is partially discretionary then part may be fixed or formulaic and part may be discretionary or it may be a blend e.g. formulaic but also discretionary.

By way of examples: the discretionary element of the bonus could be dependent on the individual’s performance against a range of different criteria and/or it could be dependent on the employer’s or a department’s performance.

A bonus may be expressed to be wholly, fully or absolutely discretionary but in reality is not at all discretionary or only partially discretionary. This situation could come about as a result of other terms relating to the bonus, side terms (specified in writing or orally) or ‘custom and practice’. It is very rare for a bonus not to be the result of some form of assessment.

There is now case law that an employer must not exercise a discretion irrationally or perversely. This “fetter” applies automatically and irrespective of whether it is expressly outlined in the terms.