Bonus plans: one size doesn't fit all

HSBC Holdings is planning to introduce a "target pay variable" scheme for junior staff members who previously did not have specific bonus targets.

The pay will be introduced for most grade 4-8 colleagues “to ensure there is greater clarity and transparency on how performance impacts variable pay decisions," an HSBC spokesperson told Bloomberg.

While the HSBC plan is a “good start” and an incentivizing factor for employees, Richard B. Johnson, co-founder and partner at Ascent Employment Law, questions if one solution will fit all staff members.

With growing generational difference in the way people want to work, he highlights the need to devise incentive and reward plans that are more meaningful for employees.

“One of the issues that we’ve been seeing is that a once-a-year bonus cheque isn’t cutting it anymore,” he said. “There's definitely more effort being put into devising plans that are going to actually incentivize and reward people in a way that is more meaningful to them than just a one-time cheque.”

The workforce is becoming more interested in non-monetary benefits that still provide security and serve as an incentive, he said, adding he has seen an increase in the desire for extra paid vacation time, parental leave top-ups, continuing education opportunities and access to the latest tools and technology as alternatives to a monetary bonus.

“Employees are increasingly looking at bonuses that we don't always directly correlate with the bonus conversation, but these are all seen as bonuses — just under the guise of being a perk or a benefit to joining an organization,” Johnson said.

Legal considerations of bonuses

When developing any form of compensation program, Johnson emphasizes the need for a mix of practical and incentivizing aspects with legal considerations.

It is important for employers to be clear and transparent about how a compensation plan will drive performance in the way it’s intended to, while also ensuring that it isn’t unintentionally abused if the appropriate restrictions aren’t in place, he said. Having clear job-related metrics and clarity with regards to what job expectations and how those will be measured are essential.

“You’ve got to understand your staff and your people, while also asking: Are you setting yourself up for liability? Are you paying out where you don't intend to? Or are you making it too stringent? What do the terms say? So, you always have to balance the practical and legal sides,” Johnson said.

Another key aspect for avoiding potential legal complications related to compensation plans is ensuring that certain groups aren’t being favoured by the plan, or alternatively, discriminated against, he said.

“You want to be careful to avoid discrimination if a bonus plan doesn’t apply to everyone. So, are you inadvertently providing technology or tools or bonuses only to employees who don't have families, to one gender over another, or are you providing bonuses that employees with certain learning disabilities or medical issues are not going to be able to use fully for one reason or another? So, it’s important to think about those unintended consequences.”

Discretionary, non-discretionary compensation plans

It is very common to see employers have employee contracts or bonus policies that say the employer has full discretion to determine if and how much to pay as a bonus, said Joel Smith, partner at Williams HR Law.

In some instances, an employer does have discretion to determine bonus payments. However, courts are increasingly determining that although a bonus plan or employment contract says the incentive compensation is discretionary, it’s not truly discretionary, as the employer determines the incentive compensation based on certain measurable targets and provides the entire compensation year after year consistently, he said.

“It’s not uncommon for the courts to determine that a discretionary bonus plan really isn’t discretionary and forms part of a key aspect of an employee’s compensation, and when looking at termination entitlements, if a discretionary bonus plan is found to not be truly discretionary, the incentive compensation will form part of the termination entitlements that employee has after dismissal.”

Oftentimes, it’s in the employer’s interest not to state that a bonus plan is discretionary if it truly isn’t and is actually non-discretionary and based on targets. Instead, employers should ensure there is appropriate language in the bonus plan or employment contracts, specifically with regards to what happens to an employee’s termination entitlements, Smith said.

“The biggest benefit of a truly discretionary plan is that it's up to the employer to provide a bonus based on their financials and whether this is something they can afford to pay out. However, the big drawback here if that if it’s not truly discretionary in practice, they you may not have contracted to protect yourself as an employer in the way you could have if you were more forthright about what type of plan this was.”