
- Why do you want to offer a bonus?
- Who do you want to benefit?
- What behaviours are you trying to reward?
- What performance are you trying to measure?
- What targets need to be achieved? and
- Why do you want to offer a bonus?
- There is a clear link between the contribution of the individual and his or her reward;
- The bonus is worth having; and
- There is a reasonable chance of obtaining it at the required level of performance.
Who do you want to benefit?
People often believe that bonuses are only for very senior management as they make the greatest impact on results and should be rewarded for their efforts. That’s, quite simply, not true. Bonuses are appropriate at all levels.What behaviours are you trying to reward?
There is a bonus to suit every occasion. Do you want to promote company success? In that case some sort of profit sharing plan may be best. Keen to make a top-level recruit? Signing-on bonuses would establish invaluable goodwill at the outset, perhaps as a result of buying-out old benefits from the previous employer.What performance are you trying to measure?
Bonus schemes can be based on a single performance measure or a range of measures. Single factor bonuses allow particular emphasis to be placed on a key target or business objective. This may be of ongoing importance, such as profits or productivity or, of particular relevance to the oil and gas sector, health and safety.What targets need to be achieved?
Often, too little importance is attached to the target-setting process. This is a mistake. However well designed the bonus plan is, its effectiveness will always be undermined by a business which proves unreliable or unrealistic in its target-setting. If the target numbers lack credibility and stray beyond the stretching but achievable, into the unimaginable, plan participants will likely disengage and the incentive value of the bonus will be diminished.Legal considerations
A question that companies often ask me in relation to their bonus arrangements is, “Should we formalise them by adopting a legal set of bonus plan rules?” Invariably, their existing bonus arrangements operate along loose policy lines or have as their constitution generic documentation such as an explanatory booklet. My answer is normally, yes you should. Legally, even bonus arrangements that on the face of it are supposed to be discretionary are, in reality, contractual. The legal considerations surrounding bonuses are about balancing certainty with flexibility, which is essentially a trade-off between contractual and discretionary bonuses. For example, having a set of plan rules is beneficial to employees since it is then clear what the “red lines” are and what the decision-making process should be. A purely discretionary bonus arrangement (whether in relation to an individual’s good/bad leaver status or the bonus value) can have significant (and ultimately costly) legal implications, if the decision-making process and/or outcomes are inconsistent, irrational or perverse.What does the future hold?
Clawback is becoming ubiquitous in large, quoted companies and I believe that over time most large organisations will adopt it. Clawback is a method to recoup variable remuneration such as cash bonuses.Nigel Watson is a partner at the law firm Brodies LLP. He specialises in employee benefits, executive reward and remuneration.
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