Bonus Schemes

  • Pay & Benefits
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Peninsula Group, HR and Health & Safety Experts

(Last updated )

Rewarding employee with extra pay is a great way to incentivise them and drive better performance. But what exactly counts as a bonus and what are the legal issues around it?

If you offer staff extra pay for performing to a certain level, they’ll feel well rewarded and try harder to reach that level in the future.

Employees value contractual bonus and reward schemes, which in turn gives them value to many large employers. This is because of the boost in employee and business performance.

But ‘bonus’ is a broad term which covers several kinds of employee reward and incentives. Which is right for your organisation? If you’re thinking of creating or renewing your employee bonus scheme, here’s what you need to know.

What is a bonus?

An employee bonus is a sum of money added to a person’s wages which increases their overall income.

There can be several circumstances when staff receive this money. It should come as no surprise that they are usually very popular among the workforce.

It is important to remember that employment law does not require you to provide any form of bonus to your staff. As long as you pay them in line with national minimum wage rates, you are free to set base salaries as you wish.

That said, if managed correctly, bonuses can be highly beneficial for your company.

Company bonus schemes

So, if it is not a legal requirement, why should you provide a work bonus? After all, it is additional money to payout. You may feel that you already pay your staff enough for what they do.

Well, the answer is employee engagement. Bonus schemes can be an invaluable method for keeping staff morale high internally. It can also attract the most talented applicants for a particular position. 

Not only can paying bonuses to employees be a great way to reward them for their work, but it can also reward them. They may feel motivated to put more effort into their role if they see a clear goal to work towards.

This could be good news for managers and the company as a whole.

Types of bonus plans

Bonuses don’t have to recognise individual performance.

  • Individual: best for incentivising employees to reach individual targets, such as sales targets.
  • Team: when your workforce is split into teams with defined goals.
  • Company-wide: for rewarding strong annual performance. Company-wide bonuses are usually discretionary since many factors can affect an organisation’s ability to pay.

Bonus schemes examples

There are many options available to a business in determining a good way to justify a bonus.

For example, some companies may put in place annual bonuses. This includes Christmas bonuses or at the end of the company’s financial year. You can set rates in line with how well the business has done in that period.

Alternatively, you can consider a performance bonus to encourage employees. This can implement targets for employees to work towards, to reap the benefits of an increased rate of pay. This usually works best for short-term business objectives.

By setting an incentive bonus of this nature, you can help encourage your staff to go that one step beyond.

Bonus payments

When considering how you will provide staff with them, it’s crucial that you first consider the scheme design and overall cost.

Meeting the requirements of bonus pay could prove difficult if your company is struggling. For example, the coronavirus pandemic may impact this, even if you base the pay on staff performance.

The last thing a company wants is a disillusioned workforce who are not getting paid what they believe they deserve. To avoid this, the company needs to take great care in how it provides a bonus.

Contractual vs discretionary bonus scheme

Bonuses are either guaranteed under contract, discretionary or some combination of the two. You must pay contractual benefits to the employee if they meet the criteria. Discretionary ones have no contractual obligation.

It is important to understand the difference between the two when setting your bonus scheme rules.

If they are a contractual benefit, include it in the terms and conditions of employment or in the employee handbook. This way, the employees have an expectation of the payments and you will be under an obligation to pay it.

Non-payments can cause a breach of contract claim in an employment tribunal. This may prove bad news if the company is struggling in the run-up to the usual bonus dates. You should consider if such a scheme would be sustainable.

The alternative option is to operate a discretionary bonus system. This states that payment of the cash bonus will ultimately be down to the discretion of management. In theory, this will provide you with greater flexibility to amend or even remove the payment in line with business needs.

If staff are aware of this beforehand, it can help make the process smoother.

Even in this situation, you should still be cautious. For example, paying a Christmas bonus to all staff with no changes or interruptions. If you then amended or didn't provide this amount, you give employees grounds to make a claim.

An employee can claim that the annual payment has transformed into a custom or tradition. The consistent conduct of the employer will establish this.

Cash bonuses and tax

A cash bonus is a lump sum of money given to an employee by you. This can be periodically or done discretionally. for better-than-expected performance may be awarded to an individual, division, or the entire organisation depending on the level at which they exceeded performance targets.

As far as HMRC is concerned, cash bonuses you pay to employees are no different to regular pay. You should count bonus pay and non-variable pay as one sum, and deduct PAYE tax and National Insurance contributions as normal.

Determining monetary value

It is also important to specify how you determine the monetary value of a bonus. If it relates to company performance, you must outline this in the company policy.

If you provide different bonus amounts in relation to individual performance, establish why. You can refer to a fair and reasonable criteria for this. The criteria should state whether or not an employee has met a pre-specified target.

Failure could lead to complaints that some employees feel unfairly treated. This could even run the risk of unlawful discrimination claims.

The Job Retention Bonus

You should note that a company bonus is not the same as the government’s Job Retention Bonus. The government set this up as an incentive for companies that used the Job Retention Scheme and Furlough Scheme. The Job Retention Scheme gives £1,000 per employee a company can retain up until the end of January 2021.

Need our help?

Get in touch with us for immediate assistance with any bonus or incentive policies at your workplace.

Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.

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