Performance bonus and corresponding incentive and commitment arrangements

Employers often need to encourage their employees to perform increasingly better and to build employee commitment. One way to do this is to introduce a performance bonus based on the fulfilment of certain targets. In addition to performance bonuses, a common instrument for incentivising and engaging employees is to offer them stock options on top of their regular salary and sometimes also on top of the performance bonus.

Performance bonus program for employee groups

The performance bonus program is a program created for several employees, which is applied equally to all employees within its scope. An employer can have several performance bonus programs for different groups of employees. Receiving the performance bonus is tied to set goals, which can be related to, for example, the employer’s total turnover or profit, the profit of an individual unit and/or the employee’s personal performance.

Performance bonuses must be agreed on carefully to avoid ambiguities

A performance bonus may be agreed in an employment or management contract. The terms of the performance bonus may be agreed in detail in the contract or simply by reference to the employer’s general performance bonus scheme. Performance bonuses are often open to interpretation, so their terms should be agreed or defined in writing and as clearly as possible. Instead of agreeing the terms, the employer can unilaterally define the terms of the performance bonus and make them demonstrably known to those employees and managers who are covered by the performance bonus. Examples of matters to be agreed or defined include:

  • the basis for determining the performance bonus
  • possible maximum amount of performance bonus per employee
  • performance bonus payment schedule
  • any special conditions or restrictions for receiving a performance bonus, such as the existence of an employment relationship at the time of payment
  • the effect of the employee’s possible absences on the performance bonus
  • the employer’s possibility to unilaterally change the terms of the performance bonus
  • question related to the application of collective agreements

When preparing the performance bonus program, it is also important to assess the taxation aspect and, among other things, whether the performance bonus accumulates the employee’s pension and whether it is taken into account in the determination of the annual vacation pay.

We assist our customers in setting up various incentive systems. Together with the customer, we evaluate the goals of the system, according to these goals we draft the clearest terms possible. We also assist our customers in system-related interpretation problems and disagreements.

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