Bonuses that drive performance – not conflict

For many companies, the first quarter is when last year’s annual bonus is settled. The numbers must be finalized, decisions made and payments executed. It’s a busy period, and experience shows that this is exactly when errors and ambiguities surface.

Used correctly, a bonus is an effective tool. Nevertheless, we see many businesses spending too little time on the design itself. Vague criteria and inadequate communication often lead to frustration and disputes, the exact opposite of what you want to achieve. Most challenges can be avoided by doing thorough groundwork. What is the bonus intended to reward? Who is covered, and on what terms? What happens in the event of resignation or weak results? When this is clearly regulated in writing, much is accomplished.

There is a big difference between a bonus that is an add-on to base salary and a bonus that constitutes a substantial part of income. In the latter case, stricter requirements apply for predictability and clear terms. Vague formulations about discretion will often be insufficient, both practically and legally.

Below we have reviewed the most important points worth keeping control of—whether you are establishing a new scheme or just ensuring that the one you already have actually holds up.

Accrual criteria

• It sounds basic, but many bonus schemes lack a precise description of what actually triggers the bonus and how it is calculated. Once the decision has been made and the figures communicated, it is too late to clean up unclear criteria. Be concrete: what is measured, over what period, and who determines the final amount?

Employees who leave

• This is one of the most common points of conflict in bonus matters. The starting point is clear: freedom of contract applies, and it can, for example, be agreed that the employee must be employed at the time of payment. Such clauses should be explicit.
• One important exception: for bonus schemes that function as the central payment for the work performed—the bonus makes up the main part of the employees income—it can be argued that the bonus is in reality earned on a rolling basis, and that a requirement to remain employed at payment effectively entails an unreasonable loss of income.
• Without an employment clause, the question becomes more unclear: when is the bonus actually earned, in the sense that there is a legal claim to payment? Is it at the end of the bonus period? On the payment date? These questions are regularly tested in court, and the answer will depend on a specific interpretation of the agreement and the surrounding circumstances.

Holiday pay

• As a clear main rule, bonuses must be included in the holiday pay basis, and holiday pay is paid the year after it is earned. A bonus paid in 2026 will therefore as a starting point give the right to holiday pay in 2027, and a bonus that “includes” holiday pay may therefore not work as intended. Read more about this here: Does the bonus scheme entitle you to “double” holiday pay?

Amendment or discontinuation of the scheme

• If the bonus is set out in the individual employment agreement, more is required to change it than if it is a general company scheme. Unilateral changes without sufficient notice may give rise to claims from employees.

Equal treatment

• Bonus schemes must be administered in line with anti-discrimination rules. Bonus determination must not be affected by gender, parental leave, age, or other protected characteristics. Employees on parental leave cannot be automatically excluded from bonus schemes, and discretionary assessments should be documented.