The truth about bonuses

In recent years, bonuses have often attracted negative press coverage. Some companies have tried to retract bonuses promised to employees. Some have been successful, but the majority have not. Last week, Rabobank’s board members announced that they were waiving their bonuses for 2012. So how is this agreement likely to have been reached?

Increasing numbers of companies are using a bonus system to motivate their employees to make extra effort. When bonus amounts are excessively high, this can lead to public outcry.

Although the public reaction is very understandable in some cases, an employer cannot simply retract the promise of a bonus at a later stage. That would be unfair. In many cases, the employee has carried out extra work to achieve his target, without being paid for overtime or receiving a supplement for working irregular hours. In some cases, the employee has also agreed to a lower basic salary than he would generally have accepted if there had been no bonus scheme.

When a bonus scheme causes public outcry, employers and employees sometimes agree that the bonus will be paid by a different route. For example, by increasing the employee’s basic salary after all or closing a gap in his retirement savings. This way, the employee gets his “bonus” and the employer’s reputation is saved. I don’t know whether the Rabobank board members came to an arrangement of this kind, but I certainly wouldn’t rule it out.

If an employer wants to avoid discussions of this kind, he can retain the option to change or retract the bonus at a later date by including a clause allowing for unilateral amendments. That way, he won’t be bound by his promises and he can easily respond to any situation that may develop.

As always, the rule is: make clear agreements (about bonuses and anything else). What is the target and what bonus is associated with it? Who decides the amount of the bonus? When will the bonus be paid? If you make sure that everything you agree is recorded properly in writing, there’s little chance of arguments later.