Discretion: Overview, definition, and example
What is discretion?
Discretion refers to the ability to make decisions based on judgment rather than fixed rules. In a business or legal setting, discretion allows individuals or groups—such as managers, committees, or contract parties—to decide how to act within certain guidelines. This flexibility is often granted in contracts, policies, and legal agreements to allow for case-by-case decision-making.
Why is discretion important?
Discretion is essential for handling situations that aren’t black and white. It allows decision-makers to apply their expertise, consider specific circumstances, and choose the best course of action instead of being restricted by rigid rules.
For businesses, discretion can be useful in areas like approving refunds, setting employee bonuses, or interpreting contract terms. However, if not exercised fairly and transparently, discretion can lead to bias, inconsistency, or legal disputes. That’s why many contracts include limits on how discretion should be used.
Understanding discretion through an example
Imagine a company has a policy that employees may receive performance-based bonuses, but the exact amount is determined at the manager’s discretion. This means the manager can consider factors beyond just sales numbers—such as teamwork or leadership—when deciding how much bonus an employee should receive.
However, if the manager uses discretion unfairly, such as favoring certain employees over others without clear reasoning, it could lead to disputes or complaints about unfair treatment. This is why well-defined policies often guide how discretion should be used.
An example of a discretion clause
Here’s an example of how discretion might be addressed in a contract or policy:
“The Company reserves the right, at its sole discretion, to determine the eligibility, amount, and timing of any bonuses or incentive payments. All discretionary decisions shall be made in good faith and in accordance with the Company’s policies and applicable laws.”
Conclusion
Discretion allows businesses and decision-makers to adapt to different situations instead of following strict, one-size-fits-all rules. When used properly, it enables fair and thoughtful decision-making.
However, to prevent disputes and maintain trust, discretion should be exercised transparently, with clear guidelines on how it should be applied. Whether you’re setting company policies or drafting contracts, defining the limits and responsibilities around discretion can help ensure fairness and consistency.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.