What Performance Bonus Programs Get Wrong, and Why It Matters for Performance and Legal Risk

Performance bonuses are meant to motivate, reward excellence, and align employee behaviour with business goals. But many bonus programs do the opposite, fueling anxiety, distraction, and disputes, while quietly increasing legal exposure.

Recent research from MIT Sloan Management Review identifies three design choices that consistently lead to better outcomes in pay-for-performance bonus programs:

1. Clear, written criteria for bonus eligibility

2. Longer assessment periods (for example, annual rather than quarterly)

3. Higher base-pay–to-bonus ratios

At first glance, these may look like straightforward compensation design decisions. But what they’re really about is reducing financial insecurity. And that’s where performance research and employment law intersect in ways many employers (and even many lawyers) still underestimate.

The research shows that uncertainty around pay increases distraction, anxiety, burnout, turnover, and presenteeism, undermining the very performance that bonuses are meant to incentivize. From a legal perspective, that same uncertainty often shows up later as disputes, claims, and costly litigation.

Clear Bonus Criteria: Better Performance, Lower Legal Risk

Many employers intentionally keep bonus criteria vague to preserve flexibility and discretion. From a business perspective, that can feel prudent. From a legal perspective, it’s increasingly risky.

In Bowen v JC Clark (Ontario Court of Appeal, 2022), the employer relied on an incomplete, unweighted list of factors and what it described as “unconstrained discretion” to determine bonus eligibility. The Court of Appeal rejected that approach, holding that purely subjective discretion violated the employer’s obligation to exercise discretion fairly and reasonably.

The result? Terminated employees were awarded bonuses aligned with those paid to similarly situated peers.

Clear, written bonus criteria don’t just support performance; they also:

• Reduce disputes about fairness and reasonableness

• Save time and legal costs

• Increase predictability for employees

• Align directly with the productivity gains highlighted in the MIT research

In other words, clarity isn’t just good management. It’s good risk management.

The Equity Lens Most Bonus Policies Are Missing

One important benefit the MIT article doesn’t explicitly address: clear bonus criteria help mitigate bias. Decades of research show that unchecked discretion in compensation decisions leads to more biased outcomes, often disadvantaging equity-deserving employees. Over time, those patterns don’t just damage morale and retention; they can create real human rights exposure.

Vague discretion isn’t neutral. It concentrates power, obscures decision-making, and makes inequitable outcomes harder to detect and harder to defend.

Well-designed bonus criteria promote transparency, consistency, and accountability. From an equity perspective, that matters. From a legal perspective, it matters even more.

“But What About Employees Who Leave?”

I get that a lot of the hesitation around bonus criteria is driven by the desire to avoid bonus payouts after an employee leaves. But vague eligibility criteria aren’t the right tool to address that. A better (and fairer) fix is to deal directly with the “actively employed” language in bonus clauses. I still see many policies using that phrase without clarifying that it refers only to the statutory minimum notice period. Without that, employers remain on the hook for bonuses throughout the common law notice period.

Some relatively simple, but legally meaningful, fixes include:

• Defining “active employment” as ending at the statutory minimum notice period

• Clearly stating that bonuses do not accrue and are not earned until paid

• Giving employees a real opportunity to review and agree to these terms in advance

The Takeaway

Better bonus design isn’t just about incentives. It’s about trust, predictability, equity, and defensibility. Employers who treat bonus programs as both a performance tool and a legal instrument are far better positioned to attract talent, manage risk, and avoid expensive surprises.

Want Your Bonus Plan to Work?

If your performance bonus program hasn’t been reviewed recently, there’s a good chance it’s creating more risk than you realize.

I help employers design, review, and update compensation and bonus plans that support performance, reduce legal exposure, and align with fairness-forward best practices.

👉 Get in touch to schedule a review.