bonuses can either be associated with the success of the organization considered as a
whole or as a single division, business unit, factory or store.
Whether this form of bonus entails a direct employee participation in the business
fortune and misfortune, it does not take into account employee efforts and contribution,
neither as individual nor as part of a group, to the attainment of the pre-identified
company KPIs. Bonus schemes based on meeting pre-set KPIs however help employers
to foster a feeling of citizenship and a sense of belonging amongst staff and can be used
both in isolation and in combination with other types of schemes.
Profit-sharing schemes
This type of programmes provides for bonuses to be paid whether and only whether the
organization, considered as a whole, has made a profit. The cash additions may be paid
according to a pre-identified formula or at board discretion (Armstrong, 2010).
Also in this case, the scheme does not offer individual recognition, but helps reinforcing
individual sense of belonging and participation to the business success.
Gain-sharing schemes
According to this type of schemes, bonuses will be paid to employees whether the overall
organization or the single business unit has attained an increased level of productivity
measured by means of a predetermined indicator. The programme basically allows
employees to have access to part of the financial gains achieved by the employer.
As maintained by Armstrong (2010), this type of arrangements can reveal to be
particularly difficult to manage and ineffectual whether only a limited share of the
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amount calculated according to the pre-identified indicator will be distributed amongst
staff. On the other hand, this scheme can effectively contribute to make individuals
perceive the impact of their contribution to the attainment of the outcome measured by
the indicator identified at the outset by the employer (for instance: added value,
customer service, cost reduction, etc.).
Employee-performance-related schemes
Individual-related bonus schemes
This kind of programmes unquestionably represents the seminal meritocratic scheme.
According to these arrangements, individuals are in fact rewarded on the basis of their
contribution, efforts and performance. Employees can therefore perceive that their
efforts and dedication to the attainment of the pre-set objectives have been recognized
by their managers and should feel motivated to repeat their performance in the future.
Albeit the financial reward aspect may have a relevant impact, this type of schemes can
also reveal to be particularly effective for the intrinsic effect they can produce. By means
of this approach an employee can directly associate his/her efforts to a prize which
represents the recognition of a good job or more in general of an activity which has been
appreciated and recognized as such by the employer. The financial prize can be thus
considered as a means to an end and not as the end itself.
On the flip-side, the scheme can be perceived as affected by bias and consequently as
unfair by some individuals, mostly by those who do not receive the bonus, who can
hence react negatively to its implementation. Being able to support bonus payment and
non-payment decisions, regardless of their objective grounds, could reveal to be
therefore of paramount importance for the successful execution of the scheme.
Particularly important to this latest extent is ensuring the coherence of the programme
mechanism with the business culture and the message it practically carries.
Team-based bonus schemes
Whether the firm is interested in encouraging and fostering team working in that
considered crucial for the attainment of organizational strategy and objectives, and this
is supported by the business culture, paying bonuses on the basis of the performance
achieved by groups or teams of individuals can reveal to be the most suitable and
effective approach to introduce and implement within the firm. On attainment of the
objectives assigned to the group, the pre-identified bonus will be equally divided
amongst the employees forming it.
This type of scheme, however not completely immune from downsides, can certainly
help employers to encourage cooperation and multi-skilling amongst the group members.
It is likely that each individual will do his/her utmost in order to contribute to the
attainment of the identified objectives and, to this extent, being able to perform tasks
usually carried out by other peers could reveal to be of paramount importance for the
timely attainment of the pre-identified objectives. Whether a genuine sense of belonging
to the group is actually developed by each member of the team, it is also likely that poor
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and below-average performers will do their best to improve their level of contribution in
order to reduce the gap with the best performers.
One of the drawbacks of these schemes, in addition to the wider difficulty of objectively
measure performance, is that best performers could find it unfair being rewarded as
much as poor performers, especially whether these should do nothing to genuinely
improve their level of contribution to the attainment of the group objectives.
Combined schemes
Employers may find it more appropriate having recourse to a combined form of company
and individual performance indicators in order to regulate their bonus scheme
mechanism. In this case, the availability of a budget to pay bonuses can be determined
on the basis of the business performance; whereas each individual or group access to
the available cash will be subsequently determined on the basis of the individual or
group contribution and performance.
This type of bonus schemes can actually enable employers to pay bonuses only whether
the business has attained its intended results, measured on the basis of the KPIs
identified. Once these have been achieved, individuals and teams could be considered
entitled to receive a bonus whether these have satisfied the performance level
requirement set by the employer, but still on the basis of and according to their actual
level of contribution and performance. Combining the characteristics of employee- and
business-performance-related schemes, these kinds of programmes might reveal fairly
tricky to manage and execute in practice.
Designing and developing schemes neatly
Bonus schemes need to be first and foremost as clear and as simple as possible.
Individuals need to understand from the outset which elements will be considered by the
employer to determine whether and eventually to what degree a bonus will be paid. This
entails that the objectives and targets to which the payment of the bonus are associated
need to be clearly stated, irrespective of the circumstance that these can be linked to the
business, individual or team performance.
Employers also need to be clear about the existence and impact of the threshold
eventually set for each of the variables identified and to which the payment of the bonus
is firmly and strictly associated with and dependent upon. Whether the employer would
consider, for instance, that in order to pay annual bonuses a minimum level – threshold
– of profit should be attained by the firm, this needs to be clearly explained to
employees. Individuals should also be informed whether, for example, a threshold for
the bonus payment is also associated with the customer service level or any other
variable.
In order to protect the organization from the risks typically associated with bonus
payments, bonus programmes should also clearly outline and provide examples of the
special and particular circumstances under which bonuses may not be paid by the
organization. Whether a bonus scheme should take into consideration individual or team
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performance, or a combination of both, as a reference for the bonus payment decisions,
introducing a clause detailing that in the event the business should not achieve, for
example, a minimum level of profitability or of sales, bonuses will not be paid, could help
prevent later disappointment and pointless tensions amongst staff. This type of clause
can reveal to be particularly effective during economic recession or downturn periods
whether employers should actually be unable to pay bonuses by reason of financial-
related difficulties.
Regardless of downturn and recession periods, however, in order to avoid predictable
failures, employers should invariably take extra care with designing bonus schemes
always ensuring that these are properly financed and funded.
The legal aspect
Paying reduced or no bonuses
The payment or non-payment, in full or in part, of a bonus can in some cases give raise
to legal disputes. This can, in general, be avoided by means of properly and clearly
communicating to, and agreeing with, staff the rules underpinning the overall bonus
programme. Notwithstanding, in some cases, especially in those cases in which specific
agreements are reached between employers and individuals filling particularly important
roles within the business, the risk of litigation can be higher and trickier to manage and
resolve once arisen.
The source of a bonus payment: express or implied terms?
Express terms
The payment of a bonus, like every other terms and conditions of employment, may be
provided for either in writing in the written particulars or contract of employment or,
since this might not necessarily be the case, verbally.
Albeit the written form of a bonus agreement might not be required ad substantiam,
meaning by that that the written form might not be considered necessary for the validity
and enforceability of the agreement, always subscribing a written document with
employees can definitely help employers to solve the disputes eventually arising in the
future. A written document in fact even though not necessary ad substantiam can always
be used ad probationem, that is, to provide evidence of the terms and conditions agreed
between employer and employee and prove, whether required, that the employer made
a specific and precise offer to the employee and that this accepted it as formulated by
the employer in the written document.
The main document and reference in case of litigation is clearly represented by the
contract of employment. Whether this should contain a clear and unequivocal
entitlement to the payment of a bonus, this would be clearly considered part of the
express terms and conditions of the contract of employment.
What in general typifies the express terms of employment is the circumstance that these
have been discussed in details between the employer and the employee, agreed and
accepted by both parties. As such, these terms become legally binding. The formulation
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used in the contract of employment to entitle an individual to a bonus payment becomes
therefore extremely important (Gannons, 2011). As a general rule, whether an employer
wants to keep a degree of latitude as regards the bonus payment, this should avoid
phrasing the bonus clause in a way which absolutely entitles individuals to receive the
bonus payment. The caveat should rather be formulated in a way enabling the business
to retain the right to pay it in part or not to pay it by any means whether required by the
circumstances.
Staff handbooks and even e-mails and notice boards, albeit not necessarily
encompassing a contractual and hence legally binding status, can contains information
which could be used by the court to decide on a dispute. Employers and the business
management should consequently take extra care with devising these documents and
with writing whatever type of letter or note.
Implied terms
Implied terms of a contract of employment are those which, albeit overlooked and not
agreed at the moment of starting the working relationship, are deemed necessary to
regulate the matters not expressly covered by the written documents and hence to
integrate and complete these. The tenet on which a court will eventually establish an
implied term is that whether this should have been discussed by the parties it would
have been agreed in a certain way by these, in accordance with their presumed
intentions.
In general, as regards the UK law, the most relevant implied terms, to the extent of a
bonus payment, are “mutual trust and confidence” and “not to act arbitrarily,
capriciously or inequitably.” Indeed, in order to establish whether an alleged implied
term can be considered as such, the courts are also very likely to give a high degree of
importance to the practical conduct of the parties.
Cases in which an employer can pay a reduced or no bonus during employment
According to the implied term on the basis of which an employer should not act
arbitrarily, capriciously or inequitably, there are basically two factors which can restrict
employers’ latitude to pay, fully or in part, annual bonuses: the impossibility to explain
and sustain the concern’s decision not to pay a bonus and the breach of discrimination
law.
More in particular, whether a firm’s decision not to pay, or pay a reduced amount of the
agreed bonus, should be sustained by rational and well-supported arguments (the
employer has therefore acted neither arbitrarily nor capriciously), as emerged from the
UK court case Clark v Nomura International Plc. (2000), it is unlikely that the courts
could impose a business to pay an employee the full bonus. With reference to this aspect,
for instance, a court decision could be based on the assessment of the overall business
performance and actual circumstances. Albeit an individual has objectively performed
well the payment of the bonus may be in contrast with the current financial health of the
business. In Europe, the respect of this tenet is provided for by the Capital Requirements
Directive no. 3 (CRD3) promulgated as regards the financial sector organizations.
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Observing this tenet, however, can undoubtedly reveal to be useful for all the employers
irrespective of the industry they belong to (Gannons, 2011).
It depends on the real employers intentions, but firms wanting to consider bonus
payment as discretionary, should take extra care with the way their employment law
specialists device the relevant caveat in the employment particulars and in the terms
and conditions of the contracts of employment. Even in those cases in which a bonus has
been agreed in express terms as discretionary, the way it is couched can reveal to be
crucially important and should leave no doubts as regards its discretionary attribute.
The term discretionary itself needs to be fully explained and the degree of its application
clearly identified. The importance of this principle actually emerged, in the UK, in Small
and Others v The Boots Co. Plc. and Boots UK Ltd. (2009). The Judge of the EAT
considered “ambiguous” the use of the adjective discretionary in the documentation
provided by the Respondent, considering that it could have been referred either to the
decision whether to pay a bonus at all or to its calculation method or to its amount or to
other factors or to all of these aspects considered together. Simply defining the bonus as
discretionary, hence, is not enough and sufficient to determine the extent to which an
employer’s discretion applies.
It is very likely that albeit in the employment contract it has been clearly stated that the
bonus payment is discretionary, this could not suffice to totally protect the employer
from the consequences of possible claims. As discussed earlier, the fact to show in the
terms and conditions of employment that the payment might not be made, either in full
or in part, could not be enough if the circumstances to which the employer refer to in
order to justify the non-payment are not sustainable and rational. Essentially, what
matters the most in order to support the non-payment of a bonus, in addition to having
clearly detailed the cases in writing, is the employer’s ability to prove that its decision is
consistent and coherent with the financial situation of the business, the current
circumstances and the employee actual level of performance and contribution.
In Ridgway v JP Morgan Chase Bank National Association the court held that the “nil
bonus” awarded to the Appellant was consistent with the circumstance that the
employee had made losses, rather than providing income, for the concern in the year
considered for the bonus payment. The Appellant had actually applied and been
authorized by the bank to a sabbatical year from April 2003. The bank did not pay any
bonus to the Appellant providing evidence that the decision not to pay was associated
with the Appellant performance during the first months of 2003 and not with his absence.
In order to meet the implied term not to act inequitably, employers’ bonus payment
decisions cannot clearly be made on the grounds of discrimination-related reasons.
Gannons (2011), with particular reference to this point, stresses the importance of
considering the circumstance that in addition to age, sex, disability, etc., discrimination
based on nationality is protected by race discrimination, this entails that foreigner
businesses based in a given country cannot pay home country employees better than
local ones.
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Another important tenet emerged from the UK’s jurisprudence relates to the so-called
anti-avoidance term. The expression anti-avoidance relates to those circumstances in
which an employer might decide to resort, to put it mildly, to not completely correct and
transparent moves in order to avoid complying with some employment terms. As
suggested by Cabrelli (2007), the anti-avoidance term in the UK mostly emerges in the
employer authority to dismiss employees and in enabling them to withdraw contractual
benefits according to the changing circumstances. Indeed, in Takacs v Barclays Service
Jersey Ltd emerged that the Appellant in mid-November 2004 had not yet met his
objectives; he was hence dismissed with a letter sent to him on November 15th of the
same year stating that his contract of employment with the Defendant would have been
terminated with effect 13 December 2004. No bonus was paid to the Appellant who
claimed the Defendant’s breach of the implied trust and confidence, anti-avoidance and
cooperation terms. Additionally, the Appellant also claimed an amount of money
considered, pursuant to the contract, as a “guaranteed minimum capital EPP award.”
The High Court of Justice held that the Claimant had real chances to succeed and hence
the case to proceed therefore to full trial. The parties settled the dispute one year later
prior to the case to be brought before the court for the full trial.
Payment bonus during notice period of after employment termination
A delicate point abut bonus payment decision is associated with the circumstance that an
employee might leave the organization soon after or just before the date set for the
bonus payment. In order to prevent to deal in an erratic way with such circumstances
should these arise and avoid legal litigations, it is definitely better to provide details in
the contract of employment of what eventually would happen in these circumstances.
This could clearly help employers to prevent claims, but could not necessarily suffice.
The courts might consider employee entitlement to the bonus payment to be effective
whether this has fully attained his/her objectives and the business is in the position to
honour its pledge.
In general, a firm’s decision can clearly be different according to the different
circumstances. It is most likely that an employer will decide to reward anyway a “good
leaver” or an employee made redundant, whereas it is likely this might be less incline to
award a resigning poor performer employee or an employee dismissed for gross
misconduct (Gannons, 2011).
As discussed earlier, the best approach to overcome these potential problems is to
clearly state in the contract of employment that in case of termination the bonus will not
be paid. In general, courts in the UK tend to impose employers the payment of the
bonus when this is paid for the attainment of past objectives, and these have been
actually achieved, but not when it is intended as a motivation or retention means.
Notwithstanding, to prevent the risk of breaching the anti-avoidance term, employers
should better avert to dismiss people in coincidence with bonus payment; this move
might in fact be intended as motivated by the unwillingness of the employer to pay the
bonus and as such as a breach of the contract of employment.
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Notwithstanding, in McCarthy v McCarthy & Stone Plc. (2007) the court held that
whether an employee has met his performance objectives as detailed in the firm’s
employee share option programme, the employer has no longer latitude to decide
whether to pay or not to pay the bonus, albeit an employee may be dismissed for gross
misconduct. The Judge also held that a bonus clause expressly regulating this
circumstance would have actually enabled the employer not to pay the bonus.
An employee can be deemed to still hold his right to the payment of a bonus also in
those cases in which he/she has been dismissed for having breached a contract term,
not only for the part of the bonus accumulated at the time of dismissal, but also for the
part of the bonus this would have received if still working during the notice period.
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