Could negative bonuses be the future of variable pay for executives?
Have a discussion about pay, and in particular executive pay, and invariably someone will raise the idea of “negative bonuses”.
The concept is simple, if bonuses are meant to be a reward for delivering a performance that is above and beyond what is expected, then surely it is only ‘proper’ that an executive should have to pay something back to the company if results are shown to be below what was forecast.
Tempting as it may be to apply such simple logic, the protection afforded to all employees (including directors) under UK employment law means that such a position would be impossible to introduce without the explicit agreement of the individual (and even then there would probably be cause for constructive dismissal given the relative bargaining powers of the parties).
However, the core concept of “upside and downside” on bonuses is valid and there are at least two ways in which these might be successfully applied.
Firstly, there should be nothing stopping a company from introducing this as part of a new package for a new appointment into a role. From a practical perspective, this could be achieved through an adjustment to a mixture of salary levels and the levels at which bonuses are paid. The commercial effect would be for someone to be paid less than a predecessor if performance was below agreed target levels.
The second way in which bonuses could be adjusted downwards would be by using a fractional multiplier on the bonus itself. There are a number of ways this could be done. A method we have seen that is gaining popularity is to use performance management scores – where poor performance translates into a lowering of the bonus amount.
For further information or to discuss any questions you may have, please do contact Stuart James.
Please note that this concept of negative bonuses is different from the malus and clawback provisions discussed in a separate article in this newsletter.