13 Jan Applying Discretion in Bonus Determination
Deciding on individual bonus awards is an important exercise to ensure pay for performance. However, many companies struggle with how to use discretion in finalizing bonus awards. In a recent Vivient survey of private companies, almost 60% of companies rated the level of discretion as a weakness in their short-term incentive plan. The subjective nature of performance evaluation and the ability of discretion to affect bonus payouts provoke time-consuming and challenging discussions. However, discretion is an important mechanism that allows decision-makers to take into account the manner in which executives and employees achieved the financial results, the quality of such results and the challenges surmounted during the year. We believe that discretion can be judiciously and appropriately used if it has been thoughtfully included as part of the bonus determination process.