Want to incentivise staff? This article considers different types of Employee Bonus Schemes

A bonus is generally a monetary payment made to an employee as a reward for hard work and endeavour. It is also a means of incentivising staff, and a bonus is generally an additional payment over and above an employee’s basic salary.

A bonus may be non-contractual and wholly discretionary and paid as and when the employer believes it is merited. Alternatively a bonus may be expressly provided for in a contract and/ or calculated according to a stated formula. Different types of bonus include:

1. Non-contractual bonuses - A non-contractual bonus scheme is generally informal and does not create any express right to a bonus. The payments may be made entirely at the employer's discretion and on the employer's own terms. The key aim is to avoid placing the employer under any obligation to implement a bonus scheme or make any bonus payments. Therefore it is important to ensure that there are no pre-contract representations and/ or any undertakings or contract variations creating such an obligation. 

1. Contractual bonuses with performance criteria – In such contractual schemes the amount is calculated by reference to objective performance criteria, such as individual employee criteria or business/ company criteria, or a combination of both. Such criteria could include an objective formula based on sales achieved. Alternatively such criteria could be based on an assessment of theemployee’s

1. Contractual bonuses with contractual terms - When an entitlement, whether to participate in the scheme, or to the amount of bonus, is contractual then the construction of the relevant bonus scheme documents is very important. Any bad drafting may lead to misinterpretation and therefore a potential dispute with the employee. Many contractual bonus schemes are included as a schedule in the employee’s employment contract. Contractual bonus schemes with contractual terms include the following:
   1. Personal performance targets - in which an employee has a contractual entitlement to receive an annual bonus based on achievement of personal performance targets.
   2. Pre-tax profits - in which an employee has a contractual entitlement to receive an annual bonus calculated by reference to the company's pre-tax profits.
   3. EPS - in which the employee has a contractual entitlement to an annual bonus which is calculated by reference to the company's earnings per share (EPS).
   4. EBITDA - in which an employee has a contractual entitlement to an annual bonus, calculated by reference to the company's earnings before interest, tax, depreciation and amortization (EBITDA).
   5. Bonus pool - in which an employee has a contractual entitlement to participate in a bonus pool which is divided among participants proportionally by reference to their target bonuses.

1. Repayable bonuses/clawbacks – In certain circumstances employers may seek to make bonus payments repayable, for example if the employee leaves before a certain period, fails to perform or breaches the contract. The employer will need to ensure that the provisions are drafted sufficiently carefully to cover the relevant circumstances and therefore are not open to misinterpretation and challenge. The drafting will need to be such that the employee is not able to argue that such a repayment clause is: (i) a penalty clause; or (ii) a restraint of trade; or (iii) unenforceable under the equitable doctrine of forfeiture; and thereby challenge the validity of such a clause.