Bonuses can be a very effective tool to motivate and retain employees while allowing businesses to control wage costs. In certain sectors and industries (eg the financial sector), bonuses are a significant element of an employee’s reward package. A director's total remuneration frequently includes variable performance-based bonuses, which are critical to attracting and retaining key individuals. An all-employee bonus plan can act as a simple alignment tool to a business’ key performance indicators, eliminating the differences between managerial and non-managerial grades.
Over recent years there has been increased public scrutiny of executive pay, particularly executive bonuses. Perceptions that such plans have supported ‘short-termism’ and ‘rewards for failure’ have led to increased regulation and legislation.
Bonuses broadly fall into two categories. Each category has significantly different consequences for employers and employees:
discretionary/non-contractual bonuses, and
contractual bonuses
For further details on all of the below issues and more general information on bonuses, see Practice Note: Bonus schemes.
The word ‘discretionary’ is frequently used in the context of bonuses. Care needs to be taken as the label can be erroneously applied. When dealing with a
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