How to create a good bonus scheme?
The bonus is a nice incentive for employees that you can use as an employer. But you have to be careful. The bonus scheme can be risky if it is not put down on paper correctly. As an employer, you then face the question: is the employee entitled to the bonus and how high is it? Obviously, you do not want to have that discussion with your employees.
In this article, we discuss how you, as an employer, can draw up a good bonus scheme. We also discuss a number of important pitfalls that often occur in bonus schemes.
Determine the performance of the bonus scheme
A bonus is a variable reward linked to certain performances. This can be the performance of the organisation, the performance of an individual employee or a combination of both. So don’t use a standard bonus scheme, but attune the bonus scheme to the organisation and the function of the employees. Describe as clearly as possible the performances that must be achieved, leave no room for other interpretations and ensure that afterwards it can be verified whether those performances have been achieved.
Bonus scheme and subjective criteria
When determining performance, beware of subjective criteria, such as linking a positive assessment to the award of a bonus. If you do opt for this, make sure that you have a fixed assessment moment every year. Not giving an assessment and then not awarding a bonus is contrary to good employment practice as set out in Section 7:611 of the Dutch Civil Code judgment of the District Court of Amsterdam 6 September 2016.
Discretionary power in bonus schemes
In many bonus schemes we also see a discretionary power (freedom to make a decision at one’s own discretion) on the basis of which the employer may decide not to award a bonus or to award a lower bonus to the employee. It is good to include this, but the employer must take into account that this discretionary power to mitigate the bonus cannot be used just like that. It is established case law that this power to determine the bonus is subject to good employment practice. It follows from case law, Amsterdam Court of Appeal 18 January 2022, that good employment practices require the employer to make clear how the discretionary power is exercised. If this is not clear, the employer may not mitigate. Therefore, explain under what circumstances moderation is possible.
Termination of employment and bonus scheme
Another important point of attention with regard to the bonus scheme is that the employer can stipulate that the employee must be employed in order to be entitled to the bonus. If an employee leaves employment halfway through the year, he is not entitled to a bonus. It is also possible to opt for a pro rata claim to the bonus if the employee leaves employment halfway through the year. It is sensible to agree this in writing, all the more so if the bonus depends on a turnover which is only determined at the end of the year.
Beware of acquired rights in bonus schemes
Has an employee received a bonus year after year and does the employer at any time decide not to award a bonus? The employee may argue that this is an acquired right. Namely, that the bonus was granted every year and therefore became part of the fixed salary. This risk arises particularly if there are no clear agreements on the granting of the bonus. The advice for employers is therefore to clearly indicate with every bonus payment that it concerns a variable reward and not an acquired right.
Bonus scheme for sick employees
During illness, an employee is entitled to at least 70% of his or her salary for 104 weeks. But what about the bonus? After all, this is a variable bonus which (sometimes) depends on the performance of the employee. An employee may also be entitled to the bonus during illness if it depends on performance, as long as it is plausible that the employee would have achieved the performance if he had not been ill. An agreement in the bonus scheme that the employee will not receive a bonus if he is sick, is not possible. The obligation to continue to pay wages during illness is compulsory law (it cannot be contractually deviated from).
Need a lawyer in Rotterdam for drawing up a bonus scheme?
In short, do not use a standard bonus scheme. Tailor the bonus scheme for your employees to the organisation and the position of the employee. Choose for clear achievements and give yourself, as an employer, a clearly defined discretionary power.
Do you need help with drawing up a bonus scheme or do you have a conflict about the granting of a bonus? Please contact Lisa Kloot of LVH Advocaten. She is an employment lawyer and will be pleased to help you with all matters relating to employment law.
