Bonuses

Introduction to bonuses

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. A director's total remuneration frequently includes variable performance-based bonuses, which are critical to attracting and retaining key individuals. An all-employee bonus plan can act as a simple alignment tool to a business’ key performance indicators, eliminating the differences between managerial and non-managerial grades.

Since the financial crisis of 2007–2008 in particular there has been significant 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. Each category has significantly different consequences for employers and employees:

1. •

   discretionary/non-contractual bonuses, and

2. •

   contractual bonuses

For further details on all of the below issues and more general information on bonuses, see Practice Note: Bonus schemes.