Bonus and incentive schemes

By Tolley in association with Sarah Bradford
Employment_tax_img9

The following Employment Tax guidance note by Tolley in association with Sarah Bradford provides comprehensive and up to date tax information covering:

  • Bonus and incentive schemes
  • Types of scheme
  • Eligibility
  • Calculation and payment
  • Entitlement or discretion
  • Designing a bonus scheme
  • Commission

Many employers operate bonus or incentive schemes in addition to paying basic salaries to their employees. Such schemes will normally make it clear whether entitlement is discretionary or contractual.

Discretionary bonuses usually give employees a contractual right to be considered for a bonus or incentive payment under the scheme, but not necessarily to receive one. In the absence of express agreement a bonus entitlement may be implied on the basis of established custom and practice, eg a right to be paid a Christmas bonus may be implied where it has been paid to all employees for a number of previous years (see Frischers v Taylor (unreported EAT 386/79)).

Any bonus entitlement should be included in the employees' written statement of employment particulars. See the Written statement of particulars or terms and conditions and Definition of wages guidance notes.

ERA 1996, s 1

Bonus schemes are generally intended to ensure that employees focus their efforts on key objectives of their employer's business. The benefit for the employee is that he may receive greater financial reward. The benefit for the employer is that employees are motivated to work harder and not lose their bonus entitlement by leaving employment.

Types of scheme

Most bonus schemes link bonus payments to some measure of performance. In this way they can be used to motivate employees. For these purposes, performance may be measured as that of an individual employee, of a team of employees or even of the employer's entire business. Bonus schemes can take a variety of forms and can include profit share schemes, commission and share option schemes. They may be all-employee schemes or individualised bonus schemes.

Bonus schemes typically measure performance by reference to pre-determined targets. Many bonus schemes are relatively straightforward and are linked to sales or other objective performance targets. Under such schemes, targets may be set at

More on Pay: