Let’s talk about bonuses!

You might be considering offering some kind of incentive or bonus for your staff.

It’s important to be aware that there are two types of bonuses an employer can give, an incentive payment or a discretionary bonus, and they are quite different.

An incentive payment is generally paid on a regular basis if X Y & Z criteria are met. This criteria is outlined and agreed upon in the individual employment agreement. It is a set amount and is agreed upon in the contract with the employee. If the criteria outlined are met, then the employer must make this payment.

However, a discretionary bonus is paid at the sole discretion of the employer. They are generally also performance-based, but the main difference is that it is not considered part of the employee’s regular pay and does not make up their total package. The employer can change the amount of this bonus at any time or not make a payment at all.

Tax on bonuses also differs depending on what type you are paying.

An incentive payment that is paid on a regular basis is taxed according to the employee’s tax code as this is considered part of their salary package.

To work out the correct amount of tax on a discretionary bonus we need to apply the lump sum taxation method as this payment is above and beyond their normal wage.

When selecting which type of bonus to pay your staff, it is also important to keep in mind the effect it has on holiday pay. As an incentive payment is part of the employee’s regular pay it gets included in their calculation for the average daily rate or relevant daily pay, therefore it bumps up the hourly rate that is required to be paid on holiday pay. In contrast, the discretionary bonus is not considered with these calculations as it is not part of their regular income.

Our advice on bonuses is that you need to be very clear on what type you are paying and the effect it will have on your business. Have very specific parameters for the bonus, e.g.

If you reach your sale target of $2,000 per month for the sales quarter of January to March, an incentive payment of $200 will be paid on the 20^th of April.

Or,

A discretionary bonus of $500 might be paid to the employee for a Christmas bonus in December depending on the employee’s performance. As this is a discretionary bonus the employer can decide to change the amount, payment date or not make the payment at all.

Ensure your employee understands if it is an incentive payment or a discretionary bonus and what that means to them.

Bonuses can be a great way to incentivise your existing employees or recruit new ones.

The trick is for the employer and the employee both to understand exactly what criteria need to be met for a payment to be made, how the payment will be taxed and if the bonus is discretionary or not.

Here’s a quick breakdown of the differences;

It is always a good idea to get expert advise that is tailored to your specific business and at CooperAitken we are more than happy to help.