2016 11 25 Thirteenth Cheques and Bonuses

Written by Bill Harvey

25 November 2016

With the holiday season around the corner many business owners have to consider the payment of an annual bonus or “Christmas bonus” to their employees. It is important however, to distinguish between a bonus, i.e. a discretionary payment generally linked to performance goals and objectives, and a thirteenth cheque, which is a compulsory payment that forms part of the employees remuneration.

In a Contract of Employment a Thirteenth Cheque Clause will read as follows: “The Employee will qualify for a 13th cheque remuneration payment upon the completion of 12 (twelve) months service during December of each year, or a pro-rata portion thereof in the event of having less service, provided that the Employee remains and is in the Employer’s employment during and until 31 December of that year. In the event of this contact being terminated prior to December, no payment will be paid out”.

Senior employees often receive an all-inclusive annual remuneration package with the option of either taking twelve or thirteen equal monthly payments. Should the employee decide to take their package in twelve equal amounts they will not qualify for a thirteenth cheque, while if they opt to take their package in thirteen equal amounts then the will receive a thirteenth cheque. In many cases employees also receive a Performance Incentive Bonus on top of their remuneration package, based upon the achievement of specific performance targets. This is then generally referred to as a “fourteenth cheque”.

Bonuses similarly form part of the terms and conditions of employment with certain Industry Sectorial Determinations such as the Private Security Industry Sectorial Determination, or Bargaining Council Agreements like the Motor Industry Bargaining Council (MIBCO) or Metal and Engineering Industry . In such cases, where the bonus is effectively a thirteenth cheque, it is enforceable by either the Department of Labour or Bargaining Council Inspectors as failure to paying a bonus will be a breach of these terms and conditions. Outside of the context of Bargaining Councils or Sectorial Determinations, a thirteenth cheque does not have to be a full basic salary, but can be either 75% or 50% of the employee’s salary.

Conversely, it is entirely possible for employers not to pay an incentive bonus at all. This will simply need to be stated to be the case in the Contract of Employment. Employers however may want to use Performance Bonus as a tool to motivate, encourage and incentivize employees to achieve specific predetermined goals and objectives over and above their normal work requirements. Typical wording of such a bonus clause in a contract of employment would then read, “Any bonuses paid by the company to employees are entirely discretionary and not guaranteed by the company. In exercising its discretion, the company will take the employee’s performance into account, as well as the financial situation of the company and its ability to pay such bonus or allowance”.

To avoid the payment of bonuses becoming a fixed practice and benefit, the discretionary nature and rules applicable to the scheme have to be clearly communicated. For the performance bonus to be effective, the amount at stake as well as the goals and objectives must be clear, simple, objective and easy to understand and measure. Targets must be well thought through, realistic and within the employee’s ambit and ability to influence and achieve. Since it is easier to subsequently relax or reduce a target than to increase it if achieved too easily, it is better to initially set goals higher. Transparency is key. Whereas a clear visible scoreboard to monitor progress is advisable, it is important to clearly indicate what targets and objectives have been achieved and how payments have been calculated when they are made.

Poorly designed, complex and unrealistic bonus incentive schemes can quite easily have the opposite effect to what employers would like to achieve when they result in unmotivated employees or result in strike and industrial action.

Bill Harvey is a Human Resources Management Consultant/Practitioner with over thirty years of experience. His contact details are 079 298 2517 or bill@billharvey.co.za.

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