Tina Reissmannof Plesner looks at the importance of remuneration when it comes to motivating and engaging employees.
"A bonus scheme is one of several means to encourage cooperation in a team. This will be the case if the determination of the bonus criteria focuses on the team as a whole, instead of on the individual employee."
Employee motivation and engagement are essential to successful cooperation in a team. This article is focusing on one of the more tangible means to create motivation and engagement, ie, remuneration.
Apart from the fixed basic salary, which is normally negotiated once a year, incentive pay or variable pay is increasingly gaining a foothold in Danish companies. Payment of variable salary is often used to increase the company’s possibilities to motivate the employees to the effect that their efforts are targeted and the results obtained are reflected in the remuneration. Therefore, the basic idea behind variable pay is to support or reward a certain conduct and often also to align the employees’ and the company’s interests.
In order for incentive schemes to have the desired effect, the objective of variable pay should first be determined, as there are many possible objectives. The most frequent objectives are to create an enhanced focus on strategic fields of development for the company and/or the employee and to ensure a competitive remuneration in order to retain employees and attract qualified candidates. Incentive schemes should be designed to support the defined objective in the best possible manner.
In relation to the preparation of incentive schemes, it is therefore important to clearly define the targets for the participants in the incentive scheme. These targets must be specific, measurable, ambitious, realistic and of a fixed duration. Incentive schemes should be designed to the effect that the individual participant has an influence over the objectives and thus a desire to obtain the fixed targets. In other words, the incentive scheme must be motivating.
Furthermore, the company should make a distinction between short-term and long-term incentive schemes and try to ensure that the participants are actually able to have influence on the achievement of the targets. This will often entail fewer participants in long-term incentive schemes, as it is mostly only the top managers who have influence on the preparation of the company’s long-term strategy.
To ensure the requested effect it is important that, to the fullest possible extent, the incentive scheme is drawn up in an uncomplicated manner and that the remuneration model is transparent. It must be possible for the individual participant to evaluate the targets that have to be fulfilled and how to fulfil such targets in order to obtain the payment of a potential bonus.
The basis of the bonus calculation may be determined at the discretion of the company. Bonus schemes may be designed either to the effect that it is largely left to the management to decide whether the employees are to receive a bonus – or that the bonus scheme is linked to the achievement of one or several specific goals.
With respect to a discretionary bonus, the management has a high degree of freedom to grant a bonus to the employees who are to be rewarded on the basis of a retrospective assessment. The clear advantage of the management not being bound by predefined bonus criteria must, however, be weighed against the fact that it is difficult for the employees who are eligible for such discretionary bonus schemes to understand what it takes to obtain a bonus, for which reason such a bonus scheme does not necessarily have a particularly motivating effect.
Furthermore, it is a common misconception that in the case of a discretionary bonus the management is completely free to choose the employees to be granted such a bonus. This is not correct, as the evaluation of the employees may not include unreasonable criteria.
Thus, it is not possible for the management to circumvent the provision set forth in Section 17a of the Danish Salaried Employees Act – see below – and omit to grant a bonus to a former employee by claiming that the employee in question does not fulfil the discretionary bonus conditions. Needless to say, it is also not possible to take account of discriminatory criteria such as pregnancy, age, gender, etc.
If the employee is able to create a presumption that unreasonable criteria have been involved – for instance, only employees who have left the company are not granted a bonus – it is actually for the company to prove that the bonus evaluation has taken place on an objective basis. This may, depending on the circumstances, turn out to be a very difficult burden of proof to carry.
With respect to performance-related bonus, the employees qualify for a bonus payment upon reaching a specific target within a certain period agreed upon in advance. Performance-related bonuses can be agreed upon for all fields of activity, and the targets are usually divided into three categories: economic targets; quality targets; and quantity targets.
It is important to draw up the bonus criteria in a manner that is comprehensible for the employees who are to fulfil them and who are remunerated according to such targets. Furthermore, it is important that the participants actually have the possibility to exert an influence on the results.
The advantage of making use of a performance-related bonus is that it offers the company the opportunity to direct the employees’ attention to the fields where improvements are particularly needed. Also – provided that transparent bonus targets have been set up – there will not be the same risk as in the case of a discretionary bonus that an employee claims that unreasonable considerations have had an impact on the determination of the bonus targets.
Section 17a of the Danish Salaried Employees Act
Cash bonus schemes are, as a paramount rule, subject to Section 17a of the Danish Salaried Employees Act. This means that in the event of termination of employment in the middle of a qualification period, the employee will be entitled to a pro rata share of the bonus payment having regard to the term of employment in the relevant period. The calculation of the employee’s term of employment must include the full term of notice and whether the employee has been released from his or her duties.
In other words, Section 17a of the Danish Salaried Employees Act implies that conditions stipulating that bonus will not be payable if the employee is under notice or has left the employment at the time of payment are not valid.
The reason for the termination of employment is of no importance to the employee’s right to a bonus pursuant to Section 17a of the Danish Salaried Employees Act as the provision is specifically based on the fact that the bonus payment is earned on an ongoing basis. This also applies if the employee is summarily dismissed in which case the bonus payment pursuant to Section 17a of the Danish Salaried Employees Act is of course only to be calculated until the date of the summary dismissal.
The calculation of the employee’s proportional bonus in the event of termination of employment may, however, give rise to some challenges. Basically, the bonus amount has to be calculated in the same manner as if the employee were still employed, after which the employee is allotted the relevant proportional share of the bonus amount. In this situation it may occur that the employee is not entitled to any bonus because the fixed targets have not been reached.
However, it is not always possible to make such calculations. If necessary, the bonus amount pursuant to Section 17a of the Danish Salaried Employees Act must instead be fixed on a discretionary basis at a level corresponding to what could be expected from the employee in question. This can be done by taking into account the bonus payments from previous years as well as the economic situation in the qualification period, including the level of other bonus grants in the company. This procedure may, for instance, be relevant if the notice period covers two qualification periods and no new agreement has been made for the last part of the notice period; or if the employee is released from duties and consequently unable to contribute to the fulfilment of the fixed targets which are based on the performance of the employee.
Amendments to bonus schemes
If it is directly stipulated in the employment contract that the employee is eligible to a bonus scheme, or if the employee has been eligible for a bonus scheme over a certain period – normally two to three years – the bonus scheme must be considered an integral part of the employee’s terms and conditions of employment.
Therefore, an amendment to the bonus scheme to the detriment of the employee – or an abolishment of the bonus scheme – will be regarded as a material change in the employment conditions. Such material change in the employment conditions must be notified in advance with the term of notice applicable to the individual employee; it is therefore not enforceable – unless specifically accepted by the employee – until the expiry of the relevant term of notice.
Furthermore, the employee is entitled to reject the amendments with the effect that he or she may consider him or herself as dismissed and may leave the company after expiry of the notice period, with the legal consequences arising out of a dismissal from the employer.
However, the rules regarding material changes in employment conditions do not prevent an annual adjustment of the targets set forth in a performance-related bonus scheme. The company is of course entitled to adapt the targets to the effect that they correspond to the budget and the strategy of the company. However, it is a condition that the changes of the targets do not make the bonus payments illusory - for instance by setting up unrealistically high targets.
A bonus scheme is one of several means to encourage cooperation in a team. This will be the case if the determination of the bonus criteria focuses on the team as a whole, instead of on the individual employee. It may be possible that financial targets relate to the budget of the team, instead of the individual employee, and also that the ability to cooperate and the results of the team are taken into consideration in the determination of the qualitative and quantitative targets.
Irrespective of the determination of targets in bonus schemes designed to support cooperation in a team, the decisive factor will to a great extent be that the management, in situations where an assessment is necessary, actually attaches importance to, and rewards, the employee’s performance in the team.