Bonus systems can be a great tool for motivating and retaining staff, but mistakes can be very costly. So if you have a scheme, do your managers understand the rules of the game?
As we highlighted on Tuesday, the FT reports that bonuses are at their highest level since 2013 as a share of UK earnings, as employers look for ways to pay workers for a cost of living higher without engaging in anti-inflation wage deals. The latest official data from the ONS suggests that employers are increasingly using discretionary rewards to compete for scarce workers, while trying to limit the overall rise in their wage bill.
Some background. There are two main types of bonus systems, discretionary and contractual. Contractual schemes will set out in the employment contract certain conditions for a bonus to be met and, if an employee meets these conditions, they will be entitled to the bonus. In contrast, discretionary bonuses, as the name suggests, are paid out at the discretion of the manager. However, importantly, they usually have some sort of structure in place to help determine when and how employees should be paid and when it comes to the exercise of manager discretion, the case law says this should be done in a way that is “not irrational or perverse”. Thus, a contractual clause is implicit in the employment contract to this effect and the employee will have a claim for breach of contract if this clause is violated.
The stakes are high and on Tuesday I spoke to Chris Evans about a new product he helped develop that is designed to help employers avoid costly litigation. I told him that mistakes can be very expensive. Here is what he said:
Chris Evans: “Absolutely, so the costs of a bad bonus system, or bad implementation, can be extremely high for an employer. An example is a case I handled relatively recently, there was a dispute with an employee leaving the bonus amount and the bonus plan rules were written in such a way that there was a level of ambiguity . The ambiguity meant that this individual could come up with a figure that was in excess of £1 million whereas according to our interpretation of the bonus system it was much lower, around the £100,000 mark. So you could find yourself in a situation because of the value of the claim, particularly this claim, where you could end up in the High Court and the legal costs alone associated with that would be in the tens or even hundreds of thousands of pounds. So what we’re looking to do here is try to make sure the bonus system is fit for purpose so that when you’re faced with a challenge like that you can clearly turn around and say no, the bonus rules are clear, there is an element of discretion here, yes, but we don’t act irrationally when exercising that discretion.
So that brings us to the key point: how do you get managers to exercise that discretion legally? So their decision must not be irrational or perverse but how will they know? Back to Chris on this:
Chris Evans: “The key element, from my point of view, is to ensure that managers are properly trained on how to exercise their discretion. So if your contracts, for example, state that personal performance and company performance dictate the amount of bonus individuals should receive, it’s very important that these are the factors that are taken into account when making the decision. exercise of discretion within the bonus system. Quite often what we tend to see is that employers come to us and say, well, we’d like to consider X, Y, and Z if we are able to and unfortunately their decision making is somewhat hampered by what is contained in an employee’s contract. So, you know, that might be fine, and that might be acceptable to the business, but what’s really important is that the manager properly takes into account what they are able to take into account when they makes those decisions because the last thing you would want to do is find yourself in a situation where you’re trying to defend a claim, you’re talking with the manager who made that decision, and they turn around and say okay I took into account the fact that they had a significant amount of absence during that year. If that’s not something you can legitimately consider, because it’s not hard-wired into the contract, then, unfortunately, you’re going to be in a position where that bonus is open, challenge.
Joe Glavina: “I understand that training managers is a good idea but, as a concept, understanding when a decision can be irrational or perverse is tricky. So how do you help managers with that? »
Chris Evans: “So I think a training course is not a bad idea. One of the things we are doing as part of the flat rate product is introducing a check sheet that every business can use. So as part of this checklist you would include what can and cannot be considered as part of the decision-making process and this effectively gives a guide to the manager on how they should exercise their discretion. Now that alone may not be enough, and you may need an element of training on this, but it gives a good benchmark for staff to look at and say, well wait a minute, this that’s how I’m supposed to exercise my discretion here and if you identify a manager factored in something they shouldn’t have then it can be recovered before bonuses are paid and adjustments can be made accordingly.
In case you missed it, earlier this week Chris told this program about the tool which was developed by Pinsent Masons to help avoid costly bonus disputes as bonus payouts hit their all time high. level since 2013. This program is ‘Discretionary bonuses reached 9-year high’ week and can be viewed now on the Out-Law website.
