Incentive-based payments can be a good way to encourage performance. However, it is important for an employer to clearly express the way the employer wants the incentive scheme to work and also to manage it effectively. A recent determination of the Employment Relations Authority demonstrates how a failure to do so can lead to adverse outcomes for an employer.
One issue this determination covered was that the employer promised a bonus but then failed to get around to actually setting the Key Performance Indicators (KPIs) on which the bonus was based. The employment agreement referred to a bonus as an annual incentive “at risk” amount of $15,000. The bonus was referred to as being dependent on meeting agreed targets. The employer never met with the employee at any stage during his employment to set his KPIs. There was however no dispute that the employee had performed during his employment. The Authority held that the employer could not rely upon its failures to specify or agree on performance measures as a basis for non-payment.
A further issue was that the employee left prior to the completion of a full year and the employer claimed the bonus was not payable on a pro-rata basis. The employment agreement was silent on that issue.
The Authority found that the bonus was payable on a pro-rata basis. The Authority was influenced by the employee’s evidence that he would never have taken the job if payment of the bonus was at issue. He had made it clear to the employer when he was interviewed that he would not accept less than what he had received from his previous job. His previous bonus had been paid on a pro-rata basis on the basis of his performance. The Authority found that common sense dictated this clause was intended to be applied on a pro-rata because employees, such as the employee who brought the claim, often start partway through the financial year.
See Jamieson v Fortlock Security Systems (2008) Ltd  NZERA 408.
Information reproduced with permission of Wolters Kluwer