staff annual bonus

Drafting staff bonus policies

A common dilemma facing employers is how to address the issue of a paying a bonus or thirteenth cheque. The best solution is to address this matter head-on, in the form of your employment contracts and related company employment documents. When you draft your employee bonus procedures, you may want to consider some of these suggestions.

  • Do you want to include a thirteenth cheque in your policy? A thirteenth cheque is usually (but not always) a double-salary, usually (but not always) paid in December – and South African labour law does not obligate an employer to pay 13th cheques.  If you’d like to consider alternatives to the traditional 13th cheque, you could also look at:
    • Including a 13th cheque as part of the employee’s annual salary package, instead of an additional payment on top of their package. The employee would then get slightly less in their monthly pay-cheque, but would get the advantage of receiving an extra “bonus” once a year. It’s a little like a forced savings scheme. It goes without saying that you would need to administer this type of concept transparently and with the full, informed consent of your employees. And be very careful if you want to raise this initiative with existing staff. They will probably be suspicious about and resistant to any radical change in the structure of their salaries, and you can’t unilaterally impose these changes on them.
    • Instead of paying the thirteenth cheque in December, which can dent the cash-flow somewhat, you can agree on another month, eg. the employee’s birthday month, or the anniversary of their appointment date.
    • Open a separate savings account where you can transfer money each month, processed at the same time as the payroll. This way you can save the funds needed to pay staff their 13th cheques without suffering a cash-flow knock.
  • Do you want to include provision for an employee bonus scheme? A staff bonus – and whether it’s paid, the amount paid, who it’s paid to – is usually (but not always) dependent on certain criteria being met. Here are some considerations:
    • Is payment of the bonus conditional on the employee meeting predetermined performance criteria? If so, does the employee know what these criteria are? And how will you measure whether or not they’ve been achieved?
    • How is the bonus calculated? Is it unique to each employee? Linked to an employee’s sales targets? Or dependent on the company making a profit?
    • Perhaps you can allocate an amount into an annual bonus pool. This can be split amongst the staff, either equally, in proportion to their salaries, or in proportion to their performance (objectively measured).
    • Think about how much discretion managers will have in awarding bonuses to their subordinates. And what performance tools will the manager use to objectively and fairly decide who gets what?
    • Paying staff bonuses can have a noticeable effect on cash-flow. You could think about easing this impact by paying the bonus in monthly instalments, or payable in two or three instalments at specified dates during the forthcoming year.

You should also include an overriding clause noting that the payment of bonuses is entirely discretionary. And if the company does decide to pay a bonus, the amount paid would also depend on the company’s profits and financial situation at the time of the payment.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.