Bonus schemes
Bonus schemes

The following Employment practice note provides comprehensive and up to date legal information covering:

  • Bonus schemes
  • Discretionary or non-contractual bonuses
  • To which aspects the discretion applies
  • Constraints on the employer's exercise of discretion
  • Effect of oral representations made to employees
  • Expectations created by custom and practice
  • Damages where there has been a breach
  • Contractual bonuses
  • Taxation of bonuses
  • Drafting bonus terms
  • More...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Note: Brexit and IP completion day—implications for employment lawyers.

Bonuses can be a very effective tool to motivate and retain employees while allowing businesses to control wage costs. In certain sectors and industries (eg the financial sector), bonuses are a significant element of an employee's reward package. Directors' total remuneration frequently includes variable performance-based bonuses, which can be critical to attracting and retaining key individuals. An all-employee bonus plan can act as a simple tool to align a proportion of remuneration to a business' key performance indicators, potentially eliminating the differences between managerial and non-managerial grades.

Over recent years there has been increased public scrutiny of executive pay, particularly executive bonuses. Perceptions that such plans have supported 'short-termism' and 'rewards for failure' have led to increased regulation and legislation.

Bonuses broadly fall into two categories. The categorisation is important and has significantly different consequences for employers and employees:

  1. discretionary or non-contractual bonuses,

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