Cash Scheme & Profit Related Pay

You will need to have regard to your company's cash and cash flow requirements when planning money payment schemes.

Whilst schemes involving the issue of shares avoid this potential difficulty they may, on the other hand, involve the dilution of existing shareholders' rights and can cause problems if the employee leaves your company's service.

The simplest type of cash benefit scheme is the one-off annual bonus which may or may not be performance-linked. More elaborate schemes based on the individual's or the company's performance may be appropriate in some cases.

It is necessary to consider whether a bonus is to be contractual or discretionary. In the latter case it has been held that notwithstanding a bonus is discretionary, the employer is under a duty not to exercise that discretion in a perverse or irrational way.

Furthermore, an apparently discretionary bonus may become a contractual obligation through custom and practice. This may occur even if the contract of employment expressly stated that the bonuses are to be "at the employers' absolute discretion".

Tax relief on profit related pay schemes was abolished for PRP calculated by reference to an accounting period beginning after 31st December 1999 (Finance Act 1997 s.62). Transitional rules applied to phase it out.