Are bonuses the easy way out for employers?

Oh, for just a drop of Elon Musk confidence. The 46 year old entrepreneur was recently grabbing headlines again (not to forget some free marketing) as the electric car company, Tesla approved an unprecedented pay deal for its founder and CEO. Musk will forego a salary and any guaranteed pay for the next ten years in return for a bonus if he meets certain growth targets. But this being Elon Musk and Tesla, it won’t be any old bonus – there’s nothing ordinary about a $55.8 billion dollar reward for meeting your KPIs, after all.

So, it turns out Mr Musk – who recently launched a Tesla Roadster into space aboard a rocket because, you know – is not that different from many of us. While it’s safe to assume that most employees aren’t giving up their regular income, the notion of earning a bonus is likely to resonate with a lot of Australians with the inclusion of bonuses in remuneration packages on the rise.

Significantly, it’s not only the senior executives who sit up the top of the corporate tree who are now being offered these bonus and incentive payments by employers. Those in middle management positions and below are finding similar kinds of financial rewards written into their contracts, with employers using them to attract and retain employees as well as motivate them to meet performance targets.

In fact, so common are bonuses and incentive payments these days that they’re even considered to be partly responsible for the current sluggish wage growth in Australia. In a recent speech, Reserve Bank Assistant Governor, Luci Ellis said businesses are holding off on implementing across-the-board wage increases and are instead responding to competition in the market by offering bonuses and other incentives to staff.

But – and this is important - unlike salary, bonuses are very rarely guaranteed which means employers can contain employee costs by offering these variable and uncertain perks. Employment contracts and bonus schemes commonly contain clauses that provide employers with the discretion to decide if bonuses will be paid which can cause considerable uncertainty and financial insecurity for employees.

Strictly speaking, employers aren’t allowed to be too tricky when it comes to incentive payments. Australian courts have found that when deciding whether to pay discretionary bonuses, employers cannot exercise that discretion capriciously, arbitrarily, or unreasonably. While this means employers do not have an unfettered right to withhold bonus payments, disputes over unpaid bonuses are nevertheless common, particularly where objectives are not set and performance is not assessed properly, fairly or in accordance with appropriate workplace policies. Apart from such disputes being a financial and legal risk to organisations, they also damage the employment relationship, morale and undermine the initial goal of using these incentives to motivate and retain staff.

No doubt there are legitimate instances where an employer can decide not to pay discretionary bonuses, particularly where performance or conduct issues are present. In 2017, the Commonwealth Bank of Australia decided not to pay short term incentives to its group executives. That decision was prompted by the money laundering scandal and made in consideration of the collective accountability of senior management for the overall reputation of the organisation.

However, these kinds of circumstances are far from the norm and when it comes to determining whether bonuses will be paid, decisions should be transparent and the criteria used in making those decisions ought to be clearly set, objective, openly communicated and applied fairly.

Whether Musk’s pay day will come - or like his orbiting Tesla Roadster only have a very tiny chance of hitting earth in the next million years - remains to be seen. But in the lead up to performance appraisal season, let his pay deal serve as a timely reminder to both employees and employers to review bonus arrangements and ensure that decisions are made reasonably and based on measureable and objective criteria. That would be a bonus for all involved.

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Mia Pantechis

Maurice Blackburn Sydney
Mia Pantechis is an employment and industrial Senior Associate, practising in Maurice Blackburn’s Sydney office. She is listed by the prestigious Doyles Guide as a member of one of the top law firms for employee & trade union representation in NSW in 2017. Mia ...

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