Employee Incentive Schemes – What are they?
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Employee Incentive Schemes – What are they?

01 Oct Employee Incentive Schemes – What are they?

Posted at 09:11h in Law by

An employee incentive scheme refers to payments or other benefits that an employer may provide to an employee that are in addition to the employee’s base remuneration. Base remuneration could include a salary, or an hourly or weekly rate.

Examples of employee incentive payments include:

1. Bonus payments.

2. Commission plans.

3. Employee share option plans (ESOP).

4. Short-term incentives (STI).

5. Long-term incentives (LTI).

Performance-based incentives refer to incentives that are provided by an employer after an employee achieves a certain performance target. Examples of performance targets might include:

1. annual or quarterly revenue or profit targets; and

2. number of monthly sales.

Performance-based incentives provide certainty around an employee’s remuneration. Additionally, they may also serve as a motivator for employees to perform at their best.

Generally, an employee will become entitled to, or eligible for, a benefit under an employee incentive scheme because of an agreement between the employee and their employer. This agreement could be part of the employee’s contract of employment or the parties could agree to it separately. The agreement may also be a verbal agreement, subject to contract law principles.

Relevantly for employers, if company policies form part of employees’ contracts for employment, employees may have a contractual entitlement to incentives set out in a policy.

An employee incentive scheme can express the entitlement to a benefit in one of two ways:

1. incentives based on performance; or

2. discretionary incentives.

Discretionary Bonuses

It is quite common for an employer to qualify an incentive in an agreement as being provided at the discretion of the employer. This discretion could relate to the employer’s decision to pay or not pay a discretionary bonus amount. It could also refer to the employer’s discretion in determining how to calculate commission amounts. For instance, the discretion to set performance objectives an employee must meet to become entitled to a commission payment.

Characterising an incentive as being discretionary does not automatically mean that an employer can deny an incentive without reason, unreasonably or arbitrarily. If an employer wishes to not provide a discretionary incentive, the obligation to exercise the discretion may subsist. The case Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 highlighted that employers must not exercise their discretion to award bonuses capriciously, arbitrarily, or unreasonably. This decision emphasises the importance of fair and reasonable decision-making when it comes to discretionary bonus schemes.

Employers must also be aware that once they award a discretionary bonus, they cannot revoke it arbitrarily. Employers must exercise their discretion to pay a bonus in good faith and not in an irrational or capricious manner: O’Sullivan Partners (Advisory) Pty Ltd v Foggo [2012] NSWCA 40.

 

Considerations on Employee Incentives

Employers and employees must carefully consider incentive payments, including commissions and bonuses and any discretion, when calculating an employee’s termination remuneration. This is because:

1. Incentives are included when calculating an employee’s payment in lieu of notice amount: sections 18(1)(a) and 117(2)(b) of the Fair Work Act 2009 (Cth) (FW Act).

2. Incentives are not included when calculating an employee’s redundancy pay amount: sections 16(1)(a) and 119(2) of the FW Act.

3. Incentives are not considered when calculating whether an employee’s remuneration exceeds the high-income threshold: section 332 of the FW Act; regulations 3.05 of the Fair Work Regulations 2009 (Cth).

Whether incentives are payable after termination of employment will depend on several factors, including the terms of the employment agreement and the specific circumstances of the termination.

Generally, if an employee earns an incentive before termination, they may be entitled to it after their employment ceases. However, if the incentive is contingent on future performance or continued employment, it may not be payable after termination. Furthermore, the terms of an employment agreement may specifically disallow incentive payments during a notice of termination period.

 

Conclusion

It is important to review the specific terms outlined in an employment agreement and any relevant company policies.

Employers should take care when drafting employment agreements to avoid including unintended terms. Moreover, employers should not leave an incentive unpaid simply because they have labeled it as discretionary.

Employees should also consider when the inclusion of incentives in the calculation of a termination payment will or will not occur.

For more information about employment agreement, see our article: Employment Contracts.

GENERAL AND CONTACT INFORMATION

The article, the content and references made are intended to keep an audience updated with information. It is not intended that the article or part of it should be relied upon as advice. Information provided may not apply to in all circumstances or in particular situations. If you do want particular advice , we welcome you to contact us on (02) 9189 5905 or at [email protected].

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