A fair and well-designed bonus scheme can be a perfect way to increase your staff's productivity and loyalty, so what do employers need to consider before setting one up? Andrew Willis of Croner explains.

Why provide a bonus scheme to staff?

Firstly, it's important to note there is no legal requirement on you to provide any form of bonus to your staff, and so long as you pay them in line with national minimum wage rates you are generally free to set salaries as you wish.

However, company bonuses can be a positive practise for employers for many reasons. They can:

• improve employee engagement
• keep staff morale high
• attract the most talented applicants for a position
• incentivise staff to put more effort into their role as they are working towards a clear goal

What types of bonus schemes are there for employees?

There are several options available to employers in determining the circumstances in which they can provide a bonus, with each option generally fitting into two categories:

Discretionary bonuses

Put simply, discretionary bonuses are paid at the discretion of a boss. Some companies may choose to put in place annual bonuses - such as at Christmas or at the end of the company's financial year - and set rates in line with how well the business has done in that period. Alternatively, bonuses could be related to individual or team performance.

Non-discretionary bonuses

Non-discretionary bonuses incentivise strong future performance and will have been agreed on in employees’ contract. These give targets for employees to work towards to reap the benefits of an increased rate of pay, for example.

What are the disadvantages of offering staff bonuses?

When considering how you will fund staff bonuses, it is crucial to find the overall cost of such a scheme. If bonuses are a contractual benefit included in the terms and conditions of employment or the employee handbook, then the employees expect the payments and you are under an obligation to pay it; non-payment can result in a breach of contract claim. This may prove to be bad news for you if the company is struggling in the run-up to the usual bonus dates.

If you operate a discretionary bonus system, in which you state that payment of the bonus will ultimately be down to the discretion of management, you will have greater flexibility to amend or even remove the payment. Nonetheless, you should be cautious. For example, if you have paid a Christmas bonus to all your staff for many years without any changes or interruptions, amending the payment can provide your employees' grounds to make a claim. This is because an employee can claim that the annual payment has transformed into a custom or tradition through the consistent conduct of the employer.

It is also essential to specify how the monetary value of a bonus is to be determined. If it relates to company performance, this should be clearly outlined in company policy. If different bonus amounts are to be provided concerning individual performance, you should establish fair and reasonable criteria to refer to, which should indicate whether an employee has met, or not met, a pre-specified target. Failure in this regard could lead to complaints that some employees are unfairly being treated better than others, which could even run the risk of unlawful discrimination claims.

About the author

Andrew Willis is Head of Legal at Croner and assumes additional responsibility for managing Croner’s office-based telephone HR advisory teams, who specialise in Employment law, HR and Commercial Legal advice for large organisations across the UK.

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Find out more

Performance-related pay (Gov.uk)

Image: Getty Images

Publication date: 27 January 2020