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...

Bonus schemes

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, and

  2. contractual bonuses

The two categories are considered below.

Discretionary or non-contractual bonuses

When dealing with a discretionary or non-contractual bonus, it is necessary to consider:

  1. to which aspects of the bonus the discretion properly applies

  2. constraints on the employer's exercise of discretion which apply as a result of case law

  3. the effect of any oral representations made to employees about bonus

  4. any expectations or contractual rights that may have been created by custom and practice

To which aspects the discretion applies

The first crucial step, when

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