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Incentives and bonuses

Incentivising employees and rewarding good performance.

Incentives and bonuses are frequently offered to employees to motivate performance and encourage loyalty. Incentive schemes and bonus provisions must be precisely drafted.

Whether used to reward good performance, to increase motivation, or to attract (and retain) talented employees within a business, bonuses and incentives have clear benefits for the employer, in addition to the obvious financial benefits to the employee!

Employees will need to consider numerous issues about how the scheme is to work including:

the scheme is to work including:

  • is it to be contractual or discretionary?
  • what is the purpose of it? To reward performance or encourage loyalty?
  • when are bonuses to be paid?
  • are there to be specific targets?
  • must the employee be employed at the point of payment?
  • can the employer make an award of ‘zero’?
  • will pro rata payments be made?
  • what about employees under investigation?
  • can the scheme be varied or withdrawn?
  • would a commission scheme or other incentive schemes be more appropriate?

Whatever the answers to those questions, bonus provisions must be clear and unambiguous if disputes are to be avoided.  Bear in mind that a scheme which is said to be discretionary but is very prescriptive around targets may create a contractual obligation this is unintended, as may custom and practice.  Even when bonuses are expressed to be purely discretionary, care must be taken in making awards – a discretionary bonus does not mean the employer is free from any obligation to make a payment.

Employers should also consider including working around the circumstances in which no payment will be made and should state clearly that a bonus in one year does not create an entitlement for future years.

Bonus conversations need to be conducted very carefully.  A contract does not need to be in writing in order to be binding!

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