Q: What should I include in my staff bonuses and thirteenth cheques guidance document?

My company typically hasn’t made it a practice to pay staff bonuses or thirteenth cheques. Occasionally we’ll add a little something into their December pay-cheques, but found it was financially unviable for us to do so last year. We received a lot of staff complaints about it, so now I’m putting a document together dealing with staff bonuses and thirteenth cheques. What should I include in this document?

A:

As you may know, South African law does not obligate an employer to pay its employees bonuses or 13th cheques. But this doesn’t stop employees from demanding Christmas bonuses and getting upset when they don’t receive them. It is therefore highly recommended for all employers to address this issue in their employment documents.

Here are some items that you may want to consider in your document.

• Do you want to include any entitlement to the payment of a thirteenth cheque? A thirteenth cheque is usually (but not always) a double-salary, usually (but not always) paid in December. If so, you can consider:
  • Including a thirteenth cheque as part of the employee’s annual salary package as opposed to an additional payment over and above his package. The employee would then get slightly less in their pay-cheque on a monthly basis, but would get the advantage of receiving an extra “bonus” once a year. It’s a little like a forced savings scheme. Of course this would have to be administered with the full, informed consent of your employees. And tread very carefully with existing staff! They probably won’t welcome any meddling with their packages.
  • Instead of paying employees their thirteenth cheques in December each year, which has an impact on your cash-flow, you can agree on another month, eg. the employee’s birthday month, or the anniversary of the staff member’s commencement of employment.
  • You could also consider opening a separate investment account where you can transfer money each month, processed at the same time as the payroll. This way you can build up the funds needed to pay the thirteenth cheque payments to staff without suffering a cash-flow knock.

It’s also worthwhile noting that thirteenth cheques tend to be rather out-dated. Many employers tend to favour a more flexible discretionary bonus structure.

• Do you want to include any provision for bonus payments to be made to your staff? A bonus – and whether it’s paid, the amount paid, who it’s paid to – is usually (but not always) dependent on certain criteria / conditions / provisos. Here are some considerations:
  • Is payment of a bonus (and the amount of the bonus) dependent on the employee meeting predetermined performance criteria? If so, does the employee know what these criteria are? And how are you going to measure whether or not s/he’s achieved them?
  • How is the amount of the bonus to be calculated? Is the amount agreed upon separately with each employee? Is it linked to sales targets or to the company’s annual profits?
  • You may also want to consider the allocation of a bonus pool each year, to be split amongst the staff either equally, in proportion to their salaries, or in accordance with their level of performance.
  • How much discretion does the manager have in allocating bonus payments to staff, if any? And what tools, measures, guidelines will the manager use and apply in order to determine who gets what?
  • Paying every staff member a bonus can have a dramatic effect on the company’s cash-flow. You could perhaps consider easing this impact by making the bonus payable in instalments over a few months, or payable in two or three instalments at specified dates during the forthcoming year.

It would also be worthwhile considering the addition of an overriding clause specifying that the payment of bonuses is entirely discretionary. And if or when the company does decide to pay a bonus: the amount paid would be dependent on the company’s profitability and financial situation at the time of the payment; and who gets paid what depends on each employee’s level of performance.

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.