Many employers want to reward employees for outstanding achievements. One way to do that is to give your staff a bonus – to provide an incentive for higher levels of performance.
Time and again, I see great intentions to begin with. Unfortunately, it doesn’t always play out as intended.
Either it doesn’t get paid when the employee expects it to be, leaving the employee bitter.
Or the employer ends up making a payment when they did not intend for it to get paid.
GOOD INTENTIONS ARE GREAT – GOOD DRAFTING IS BETTER
A recent Employment Court case demonstrates this. It was a case where an employer made a mistake in the wording of a bonus clause.
The employer drafted the clause to say that the employee would get 20% of the business’s “gross profit”. The employer later said they meant to refer to “net profit”, after overheads and other costs were deducted, not “gross profit”.
The Employment Court did not let the employer off the hook. It ordered the employer to pay the bonus on the gross profit calculation. That amounted to a payout of about $61,000.
In reaching her decision, the Judge commented:
Where the intention is clear from words used in an employment agreement, effect should be given to those words. The Court does not readily accept that people have made linguistic mistakes, particularly in formal documents.
In short, the way you word the clause is crucial because you’ll be made to keep to your word. If not well drafted, the wording could cost you more than you expected.
So how do you ride the line between incentivising staff and not paying out what you did not intend to pay?
It may help to make a distinction between bonuses that are discretionary versus those that are not.
A non-discretionary bonus or incentive is one that works like a mathematical formula.
For example, the formula might look like this:
Employee does A + Company does B = bonus of $x gets paid.
The clause in the case discussed above is an example of a non-discretionary bonus. If the company achieved a certain gross profit, the employee would get 20% of that gross profit as a bonus payment.
There is no room left in these formulas for the employer to avoid paying the bonus if the conditions are met. You must pay the bonus in those circumstances.
This provides a clear incentive for your staff. They are guaranteed to get a bonus if they do their part.
The key will be to ensure that you word the bonus so that there is no payout when you cannot afford it. Making the bonus conditional on “net profit” rather than “gross profit” is an example of how to do that.
If you don’t like being entirely bound by your bonus clause, consider whether a discretionary bonus is better.
A discretionary bonus is one that may or may not get paid, regardless of how your employee performs.
You can reserve your discretion as to whether a bonus is paid or how much is payable. That means you don’t commit to paying anything. Instead, you can look at all the factors and decide whether to pay one out or not.
The disadvantage of this approach is that it’s less certain to incentivise your staff. If they have no guarantee that working harder will pay off, why would they bother?
And if you’re not getting increased performance, why have the bonus in place at all?
Yet, if your staff see that you apply the discretionary payment fairly over time, it may still be effective.
Bear in mind, though, that even a discretion whether to pay a bonus must be exercised reasonably. That is one of your duties as an employer to your staff – to act fairly and reasonably.
Bonuses are really useful tools to incentivise staff to go above and beyond for your business.
But you must take great care to align the wording of such an incentive with your expected outcomes.
Ensure that the conditions of the bonus will work for you. And if you’re unsure they will, consider retaining a discretion whether, and how much, to pay.