Using Profit - Cash & Bonus Schemes

Cash & Bonus Schemes

You may feel that surplus cash should be used, at least in part, to reward directors and employees. This can be done in a number of ways, but it helps to have established schemes, particularly as apparently gratuitous rewards can be challenged by shareholders (or, if the company is insolvent, creditors) on the basis that they are not in the best interests of the company (or the creditors).

Apart from straight forward increases in salary or cash bonuses, there are a number of more sophisticated executive and employee incentive schemes. In addition, with the larger company in mind, it is worth considering employee share ownership trusts.

Cash Bonuses

Many companies award cash bonuses on a discretionary basis depending on the directors' assessment of the success of the company and individual staff and the available surplus cash. More formal schemes may also be used to offer incentives to staff and to encourage them to remain with the company.

Bonus Schemes

Especially where they have fixed rules, bonus schemes may be treated as a contractual entitlement for employees, so you should state clearly in the employment documentation whether a bonus arrangement is a contractual entitlement, or whether payments are discretionary. Where a bonus is shown to be a contractual commitment, this exposes you to a breach of contract claim if the bonus is not paid in accordance with the provisions of the scheme. It is also taken into account in calculating the compensation payable to dismissed employees.

In one important respect, bonus payments are no different from salary as income tax (Pay As You Earn) and National Insurance deductions need to be made.