Considerations when drafting staff bonus policies

drafting a policy

“How do I address the issue of a bonus / 13th cheque in my company’s employment documents?”

If you’re compiling employment documents for your business, then it would be prudent to put a stop to any potential uncertainty by addressing the issue of bonuses and thirteenth cheques head-on in your documents. Here are some issues to consider:

  • Do you want to include a thirteenth cheque? A thirteenth cheque is usually (but not always) a double-salary, usually (but not always) paid in December. You can consider:
    • Including a thirteenth cheque as part of the employee’s annual salary package as opposed to an additional payment over and above his package. The employee would then get slightly less in his pay-cheque on a monthly basis, but would get the advantage of receiving an extra “bonus” once a year. It’s a little like a forced savings scheme. It goes without saying that you would need to administer this type of concept transparently and with the full, informed consent of your employees. And be very careful if you want to raise this type of concept with existing staff! They will probably be very hesitant about any form of radical change in the structure of their packages.
    • Instead of paying the thirteenth cheque in December, which tends to dent the cash-flow somewhat, you can agree on another month, eg. the employees’ birthday months, or the anniversary of their commencement of employment.
    • Open a separate investment account where you can transfer money each month, processed at the same time as the payroll. This way you can build up the funds needed to pay the thirteenth cheque payments to staff without suffering a cash-flow knock.
  • Do you want to include a bonus payment for your staff? A bonus – and whether it’s paid, the amount paid, who it’s paid to – is usually (but not always) dependent on certain criteria / conditions / provisos. Here are some considerations:
    • Is the bonus conditional on the employee meeting predetermined performance criteria? If so, does the employee know what these criteria are? And how are you going to measure whether or not he’s achieved them?
    • How is the bonus to be calculated? Is it unique to each employee? Or linked to sales targets, or to the company’s annual profits?
    • Perhaps you can set aside a bonus pool each year to be split amongst the staff, either equally, in proportion to their salaries, or in accordance with their performance.
    • How much discretion does the manager have in allocating bonus payments to staff? What tools will the manager use to determine who gets what?
    • Paying every staff member a bonus can have a dramatic effect on the company’s cash-flow. You could consider easing this impact by making the bonus payable in instalments over a few months, or payable in two or three instalments at specified dates during the forthcoming year.

It would also be good to consider an overriding clause that the payment of bonuses is entirely discretionary. And if the company does decide to pay a bonus, the amount paid would be dependent on the company’s profitability and financial situation at the time of the payment.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.

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