Support for your business

Bonus Agreements & Bonus Schemes

Employers often link salary to the performance, skills and technical knowledge of employees and may seek to reward staff who meet and/or exceed these expectations. Therefore, bonus schemes or arrangements are a commonly deployed mechanism employers use in order to motivate or incentivise employees to keep the standards of work and delivery high and to reward excellent performance.

There are many types of bonus arrangements, each with their own sets of criteria. Our Employment Team routinely advises on how best to approach introducing bonus arrangements and how best to implement them once introduced.


Individual or Company-wide Bonuses

Choosing whether to introduce individual or company-wide bonuses depends on what you, as a business, want to achieve.

Individual bonus arrangements are recognised as being the best tool to incentivise employees to perform well and to reach their individual targets. Business-wide bonuses are dependent on a myriad of factors but primarily, annual performance of the business.

A business introducing a bonus arrangement must be careful to not exclude or discriminate groups of people when deciding who to offer bonus arrangements to, for example, those people who are on maternity or paternity leave, or that indirectly disadvantages people who work part-time.

Bonus arrangements come with their own risks. What does a business do when they can no longer afford to pay contractual bonuses? Do you want to reward a troublesome employee who has met their targets? If you are considering ending a bonus arrangement, regardless of whether it is discretionary or not, you should seek advice in how to do so effectively with as minimal risk as is possible, whilst perhaps also considering ways to keep employees motivated, despite this.


Contractual Bonus Agreements

Bonus agreements are becoming more frequently included in contracts of employment, especially for senior employees. A business can choose to introduce bonus arrangements at any time, but these are often negotiated when senior executives join a new business, as part of their contractual negotiations. If drafted skilfully, these can provide a very effective motivational tool, as well as securing the retention of employees that are key to the success of a business.

Should a bonus agreement be included in an employment contract, it is essential that it is properly drafted. A poorly drafted bonus provision within a contract of employment could actually be the catalyst for a dispute and/or dis-engagement and/or be challenged by a disgruntled employee. Ultimately, a poorly drafted bonus arrangement can be the cause of a relationship breakdown and have the opposite effect to what was actually intended (incentivisation and retention).

A contractual bonus arrangement can be negotiated between the employer and the employee, and may set out the criteria that needs to be met in order to achieve the bonus payment. By making the agreement contractual, you will need to consult with employees should you choose to amend or remove the clause. It may therefore often be sensible to incorporate some form of (reasonable) discretion.

It’s also important to consider your business as a whole and position bonus arrangements so that payments are triggered at the right time. Careful thought can result in greater incentivisation and retention.


Discretionary Bonus Schemes

Instead of including bonuses as part of a contract of employment, some employers choose to introduce bonus schemes whereby managers can give bonuses to employees on a discretionary basis in order to provide a reward for particularly outstanding performance. The name suggests that the regularity and monetary value of the bonus is flexible and is paid as acknowledgement of performance rather than meeting pre-agreed targets.

Discretionary bonuses allow employers to maintain the right to reserve payment of a bonus to employees. This can cause tension between employees and managers if it is unclear how bonuses are being calculated and allocated, therefore employers should always look to offer bonus payments on reasonable grounds. However, discretionary bonus schemes may not be truly “discretionary” in the event that they are consistently and regularly applied, over period of time. If employees come to rely on a ‘discretionary’ bonus because a similar amount is paid each year at Christmas, for example, this may become an implied term of the contract of employment, upon which for employees may rely. For this reason, bonus agreements need to be considered carefully at all stages of their introduction and/or implementation.

Get in touch

Talk to us about your legal challenges and discover how our expert, pragmatic legal advice and broad commercial acumen can help.