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Directors’ Service Contracts – enhanced bonus provisions

March 2014
Directors’ Service Contracts – enhanced bonus provisions

The Directors’ Service Contracts which include bonus and share option arrangements have been updated to provide for enhanced bonus arrangements. Therefore in both of our Directors’ Service Contracts which include bonus arrangements – Directors’ Service Contracts including Bonus and Share Option Arrangements (with and without PILON) – more substantial bonus provision has been added.

Bonus based remuneration is a useful way for employers to attract and retain key staff. Bonuses enable employers to reward good performance and increase the motivation of their staff. There are many different types of bonus arrangements that an employer can use, the most usual are, a non-contractual bonus, a contractual right to a bonus but with the employer retaining either an absolute or partial discretion over its award or the employee having a guaranteed right to a bonus. The most common situation for a SME business is usually one where the employee has a contractual right to a bonus but with the employer retaining partial discretion over its award. Our contracts have been updated to reflect this situation.

The relevant Directors’ Service Contracts now include an operative clause within the body of the contract entitling the director to be paid a bonus, with the detail of the bonus scheme attached as a schedule at the back of the contract. The bonus provision has therefore been drafted on the basis that the director has a contractual entitlement to receive a bonus but that this is qualified by the director having to achieve certain personal performance targets each financial year before the bonus will be paid. This means the bonus scheme itself forms part of the contract, but that the employing company has reserved itself some flexibility by providing a framework to benchmark the payment of the bonus against.

For a bonus scheme to be successful it should be as transparent as possible. This means the terms of the bonus scheme and the personal performance targets that the director must meet should be clearly communicated to the director at the beginning of each financial year. Having written records of performance targets as well as well as feedback from the employer means that expectations in relation to a bonus scheme can be effectively managed throughout the financial year.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.

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