S08AW series uses ICG to derive their bus clock. For a medium to good precision bus clock, in order of accuracy, you may:
1) Use FFL with the internal trimmed 243kHz oscillator (FEI mode)
2) Use the FLL with an external precision clock or a crystal (FEE mode)
3) Skip the FLL and use only an external precision clock or crystal (FBE mode)
Keep in mind that:
a) the internal 243kHz oscillator is not very precise: it has an basic ±20% error which may be trimmed up to a typical 0.5% by software during programming.
b) FLL is not exact: it has quite an high jitter istantaneously moving up and down of the theoretical center frequency (up to 0.2%) and the output frequency is not an exact multiple of the base frequency, but a very near value to that.
This way you may find that
1) FEI adds to the basic low-power/no-cost internal oscillator error performance the slight jitter noise of the FLL. It may be unnoticeable for most processes which do not require high accuracy.
2) FEE is better than FEI but the output frequency is not exact as you may expect and it shows some jitter anyway.
3) FBE is the highest precision mode (the same of the external source or the crystal) but it is limited to 8MHz with a 16MHz crystal, the maximum frequency allowed. To achieve the 20MHz limit you must supply an external 40MHz source.
To have a better accuracy than FLL you would use a PLL but unfortunately S08AW has not this facility: if you need that you could switch to the newer S08DN which has PLL option. Either in this case you may have some jitter but this should be fairly lower than in FLL mode and the bus frequency should be an exact multiple of the base frequency. If you need very high quality clock accuracy and no jitter you has no option other than point 3)
Encoder