Apologies to Mark Twain but incentive schemes are like statistics; they can be open to manipulation. Often have we seen disgruntled employees whose expectations of large incentive payments have not been borne out, particularly when their employment has ended. The starting point is that virtually all employees must be paid a wage (real estate agents who meet certain requirements are an exception). However, it is common for employers to hold out promises of additional incentive payments based on performance, whether in the form of commissions, bonuses, short term incentives (STIs), long term incentives (LTIs), share schemes and other innovative arrangements.

It is important to understand the difference between these various payments and the pitfalls that await. A commission is a contractual (or for real estate agents an industrial award based) entitlement where an employee is paid a certain fixed or percentage payment based on having reached particular sales targets. They are not a discretionary payment and are normally paid on a regular basis and on termination of employment (although pro rata rules may apply). There may be rules about commission splits, re credit on order cancellation and other conditions where commission may need to be repaid or is not payable.

A bonus on the other hand is generally a discretionary payment payable according to the employer’s good graces if it feels that certain criteria have been met or an employee is otherwise deserving. A bonus should always be treated as just that. Unlike commissions, a bonus is normally a set amount dependent on achieving certain criteria which are often general and arbitrary in nature. A bonus can become an entitlement if payments have been made over several years according to certain criteria but these claims are difficult. Bonuses are normally paid annually and may not be payable on termination.

If employees want some certainty of payment, then any incentive agreement should be non discretionary, contractual in nature, in writing and as precise as possible:

1. The entitlement should be referred to in the contract of employment as a specified remuneration item and not as a matter of employer “policy”.
2. The contract should itself specify or incorporate another document that sets out the criteria for obtaining the payment and how that payment will be calculated and when it is to be paid.
3. The language of entitlement rather than discretion should be used – avoid the words “you are eligible”.
4. The language should be plain and simple and able to be understood by a 6 year old – avoid techno speak.
5. Be wary of statements referring to percentages of gross or net profit which can be subject to creative accounting practices, particularly in respect of private companies, which can reduce that profit to nil.
6. Ensure the contract states whether incentives are payable in full on termination or on a pro rata basis, if at all.

A share scheme is just another form of bonus payment and to have any form of certainty, the above rules should be followed. Be aware of any restrictions on the sale of shares and check rules about dividend payments, vesting and tax implications. And, particularly for private companies, check the calculation of the value of the shares. It is common for shares in private companies to ultimately be worth very little.

The other big tip is don’t allow the employer to delay the payment. This is normally a sign of trouble and you should maintain the pressure to obtain the payment or take steps to recover the entitlement. It is common for employers to become distinctly reluctant to pay incentives when they appreciate the amount payable.  Action can be taken in the courts under the Fair Work Act for the recovery of commissions as a safety net contractual entitlement (or, in the case of real estate agents as an award entitlement). However, bonuses and other incentives are only recoverable in contract which limits the avenues for recovery. The Fair Work Ombudsman, for instance, will not be in a position to assist in the recovery of bonuses or, in most cases, commissions and certainly will not be interested in share schemes.

Employees may feel unwilling to bargain about incentive requirements when offered employment. That is understandable but just remember that the more vague the specified entitlement, the less prospect there is of enforcing the obligation. Please contact us if you would like any further information or help.