12 July 2022
An employer has been forced to pay a bonus where the bonus scheme stated a sales manager could earn up to 5 per cent of the value of any additional sales she achieved over her year-end target.
With remuneration packages being reviewed by many employers due to surging inflation and the labour skills shortage, the case is a reminder that bonus/incentive clauses should be carefully drafted and make commercial sense for the employer if the targets are achieved.
The employee’s employment contract stated:
- any sales achieved over the quarterly base figure were payable at 3 per cent of the achieved increase; and
- she would receive an additional 2 per cent bonus payment on any increase over the annual base figure.
This meant that if the employee achieved her annual sales target, all sales she achieved over that would attract a total bonus of 5 per cent of the value of the additional sales.
Crucially, the employer had not included a bonus pay-out cap or reserved any other discretion for it to adjust the bonus amount.
In 2020/21 the employer’s covid testing equipment-connected sales increased exponentially due to the pandemic, resulting in a bonus of between £245,000 - £325,000 for the employee based on the arithmetical application of the words in the contractual bonus scheme.
The employer contested the pay-out for various reasons – mainly that ‘sales achieved’ as defined in her employment contract:
- was not intended to cover the types of products which experienced an exponential increase in sales during the pandemic; and
- was only intended to cover sales personally achieved by her.
The court disagreed, declaring the employee was entitled to a bonus of £245,000. Its reasons being:
- the employer’s argument for how ‘sales achieved’ should be interpreted lacked commercial common sense;
- there was no restriction on the types of products ‘sales achieved’ related to;
- properly construed, the employment contract provided for a bonus entitlement calculated on an arithmetical basis;
- that was the way equivalent contracts had been operated by the employer in previous years; and
- except for the bonus target, each element of the calculation was objectively derived from actual sales figures and required no judgment of the value or extent of the employee's contribution.
Incentive-based remuneration such as bonuses are aimed at the attraction, motivation, and retention of key staff. However, careless language in a bonus scheme can lead to excessive entitlement, putting the business at financial risk, or disputes with key employees around expectations of bonus pay. Consideration should also be given to unexpected future events, resulting in an exponential increase in bonus payments and whether a bonus cap should be applied.
Employers considering incentives to retain and attract talent should be reviewing and carefully considering their proposed bonus scheme wording to establish if the bonus clause or scheme clearly says what is intended, makes commercial sense, yet remains fit for the incentivisation purpose for which it is designed.
If you are an employer looking for support in relation to the wording or implementation of an employee bonus scheme either for your workforce, please contact Charlie Barnes.