Why does it matter?
Money is always an emotive issue, not least when it comes to bonuses and how they are awarded. It is imperative that HR controls the conditions on which an organisation pays its bonuses, and the consistency with which these are applied.
Ensuring there is a clear audit trail supporting the rationale for why a bonus is awarded or not, and the basis for any difference in awards between employees performing the same role, is essential.
Deciding whether bonus payments are contractual or discretionary is also vital. There is always scope for discrimination or perverse exercise of discretion in awarding a bonus. And HR plays an important role in mitigating exposure to financial and reputational risks.
Ensure contracts and bonus plans are clearly drafted. Ambiguous language or criteria cause problems if the employee’s understanding is not aligned with the employer’s.
Train line managers in how to apply the bonus criteria to an employee’s performance. Consistency and fairness are key to avoiding challenges and guarding against pitfalls.
Remember that a discretionary bonus does not mean there are no limits on the exercise of that discretion – don’t leave yourself open to allegations of irrationality.
Challenge and scrutinise performance awards with line managers and record their rationale prior to communicating bonus decisions. A paper trail justifying bonus decisions will be more credible than personal recollections in the event of a subsequent challenge.
Ensure different genders, minorities, those on maternity leave and those with disabilities are not being treated differently or less favourably in the way their bonuses are calculated and awarded. Bonus litigation can be expensive where discrimination is a factor.
Pro rate a maternity leaver’s bonus according to what they received in the previous performance year. The bonus must reflect the period actually worked prior to/following return from maternity leave, as well as the two weeks’ compulsory maternity leave period. Bonuses that are payable by reference to individual performance and/or to retrospective work should still be paid to women who are on maternity leave.
Use bonuses for reasons other than those set out in the award criteria. For example: an increased bonus for retention purposes will be out of kilter with other like performers, which can lead to equal pay and/or sex discrimination issues.
Use bonuses as a tool to mitigate equal pay risks. It is better to address the underlying pay parity issues and any flaws in your pay systems or processes.
Forget to design your bonus plan so that it does not pay bonuses where there is misconduct, poor performance or the employee is on notice. This would otherwise undermine the purpose of a bonus.
Withhold bonuses unfairly where an employee has met the necessary conditions to warrant payment. This could result in breach of the implied term of mutual trust and confidence.
Rachel Reeves is counsel at Allen & Overy
This piece appears in the October 2019 print issue. Subscribe today to have all our latest articles delivered right to your desk