3 Things to Know When Setting Up a Bonus or Commission Structure

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Table of Contents

• What Do Bonus and Commission Structures Look Like?
• Implementing Clear Employment Agreements
• Create Formal Policies on Bonuses and Commissions
• Consider Employee Terminations
• Key Takeaways
• Frequently Asked Questions

As an employer, you can use bonuses and commissions to improve employee performance. However, you should avoid getting into situations where you contractually owe bonuses or commissions you cannot pay. In this article, we identify what bonus and commission structures are and explore some key factors you should consider when implementing one on top of your employee’s salaries. 

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What Do Bonus and Commission Structures Look Like?

A bonus structure means the worker receives a percentage or fixed amount of money for achieving a specific objective by a certain timeframe. For example, a financial consultant for an accounting business may receive $2,000 if they reach their key performance indicator (KPI) targets by the end of the financial year. However, it could also be a percentage of their base salary instead of a fixed amount. 

A commission structure means the worker receives part of the deal. For example, a sales representative for a computer business may receive 2% of the price of every computer they sell. Usually, the employee will receive the commission at the same time as their wages. 

A bonus or commission scheme is compensation on top of the employee’s regular salary. Naturally, they will likely receive it favourably!

Implementing Clear Employment Agreements

Before implementing this structure, you should clarify in the employment agreement that any bonuses or commissions are discretionary and do not form part of the employment agreement. This means that bonuses are not a guarantee or contractual term. Although, as the employer, you can give them if you see fit. 

For example, if you have had a very profitable year, you may pay your employees a one-off bonus without this being in the employment agreement.

Create Formal Policies on Bonuses and Commissions

Instead of putting details in the employment agreement, you could set up formal policies that regulate bonuses and commissions. These policies can be beneficial because:

• they give you greater flexibility to alter it based on your business needs; and
• you can easily refer to the policy for clear terms of your bonus or commission structure.

If this information were in an employment agreement, you would need to amend each affected agreement. This is not only an administrative hassle but can be much harder to negotiate with employees. Additionally, you can amend the policy more quickly than amending a contractual term (which requires the employee’s agreement) in a dispute.

What Should the Policies Include?

When drafting your bonus policy or commission scheme, make sure you include terms regarding:

• who the policy covers;
• who is eligible and the criteria for eligibility;
• how the bonus or commission structure is calculated;
• how and when the commission and bonuses are paid; and
• what happens when employment ends.

You should also explain the general terms and conditions of how you will govern the commission and bonus policy. For example, you may state that you:

• have the power to amend or replace the policy at any time you see fit; or
• may decide not to pay bonuses or commissions (e.g. if the company is not performing well).

Consider Employee Terminations

When you terminate an employee, disputes about unpaid commissions and bonuses can often arise. To avoid this, ensure your employment agreement and policy documents are clear on what will happen in this circumstance.

For example, you can establish a ‘cut-off’ clause in your policy document, which states that you will not pay commissions if:

• the payment cycle occurs after employment has terminated; or
• termination is due to serious misconduct.  

Usually, where the bonus or commission is an additional payment to the salary, employers will not include it in their payment calculation in place of notice or other entitlements (unless required under law or the relevant modern award).

Key Takeaways

Bonuses and commissions are a great way to incentivise employees to work to a high standard. However, it would help if you were wary of including them as part of your contract of employment with the employee. You should outline this arrangement in a policy document when you provide bonuses and commissions on top of an employee’s salary. This policy should be separate from the employment agreement. 

If you need assistance implementing a bonus or commission structure, our experienced employment lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1800 532 904 or visit our membership page.

Frequently Asked Questions