10. Bonus payments

Equal pay in practice checklist 10

What do we mean by bonus payments?

Bonuses are additions to pay that are linked to individual or team performance measured against targets or objective criteria. Employers introduce bonus payments to reward individuals for doing well. By definition a 'bonus' payment is an extra and not part of basic pay. Understandably, it is still defined as pay under the law, and therefore must not be biased in respect of sex or any other protected ground such as disability or ethnicity.

Historically, bonus payments have been an important component of the pay of many manual workers (often linked to productivity in manufacturing companies but also to people working in the finance sector). Examples of bonuses include:

  • Attendance bonus - for example to tube drivers
  • Productivity related bonus in manufacturing industry and historically to some local government groups
  • Profit related bonus - for example in retail management
  • Performance bonus payments for high fliers in the city .

How do you find out if there is a problem?

You may pay bonuses for good reasons. However, it is all too easy for pay discrimination to creep in, for example when the bonuses are historic, i.e. a part of a previous pay agreement that is no longer relevant.

As well as looking at differences between men and women, remember to think about other aspects of equality such as race, disability, age and contractual status (full-time or part-time).

You can find out if there is a problem in your organisation by looking at the amount and frequency of bonuses paid to men and women, to people from different ethnic groups and to those with a disability compared to those without, over the past year. If your records show that there is a tendency for people from one group to be favoured over another, then you need to find out why and whether that can be justified.

By analysing the differences you will get an indication of where to look further e.g. where people who get bonuses work and how the bonus scheme operates in each area. Are there individuals or groups of workers who are excluded? Are bonus schemes discretionary or fixed? Discretionary payments are by their nature likely to be more subjective and vulnerable to bias.

An example

In Ms Julie Bower v Schroder Securities Ltd 2002 Ms Bower, a share analyst with a city firm was awarded £1.4 million compensation for sex discrimination when an employment tribunal found that the figure for her bonus had been 'picked from the air'.

The company's parent group made a pot of money available for discretionary bonus payments each year, depending on the success of the business. Although the bonus payment was supposedly based upon performance surveys, client feedback and other sources, amounts varied between analysts depending on the managers’ perception of their worth. The tribunal found 'it was hard to conceive a process more lacking in transparency'. The comparators received much larger bonus payments than Ms Bower and the tribunal concluded that she had been treated differently in the way her bonus was calculated. There were no written reasons for any bonus payment or any formula applied. The tribunal concluded that some part of 'undervaluing' of Ms Bower was because she was a woman. The company could not prove otherwise.

What lies behind the differences?

The answers to following questions can help you find out what lies behind the differences.

Who has access to the bonus scheme?

Part-time workers are often left out of bonus schemes, either unwittingly or by formal exclusion. Some targets may be impossible to reach for a part-time worker, or if an award is made on the grounds of 'outstanding achievement' assumptions about the commitment of part time workers may exclude them. In most organisations part-timers will be predominately female. This may mean that there is a gender bias in the bonus scheme.

Who sets the criteria by which bonuses are awarded? Are the targets or objectives realistic?

The targets and objectives for teams should be equally achievable, in so far that it should be no easier for one team to reach their targets than another team. One team’s targets should not depend on another group, or be heavily reliant on outside factors. Targets should be within the control of the team. Employers could use objective guidance on target setting.

How are the bonuses monitored?

You need to ensure that there is a consistent approach to targets and objectives across the organisation. You also need to check how these affect men and women, or different ethnic groups. Central monitoring helps to ensure consistency, especially where teams employ more women or men (e.g. IT teams are often mainly men, retail staff mainly women). Central monitoring is also essential in checking on access to bonuses across the organisation.

What else do you need to be aware of?

Organisations which use bonuses usually incorporate them into an existing payment system. It is common for individuals to receive a different bonus depending upon their grade, point on pay scale, length of service, hours worked, team within the company. This can be confusing and employees may not always understand how the amount they are paid is arrived at. Some employers may pay bonuses for 'hard' skills e.g. producing a certain number of widgets, rather than 'soft skills' e.g. those involved in human resources, which are more difficult to measure.

Action - what you can do to put things right

Establish criteria for awarding bonuses and make sure everyone involved in the decision making process knows what these are and how to apply them.

Ensure that the performance rewarded is clearly defined and achievable. Look to minimise areas of subjectivity and link performance to SMART formula (Specific, Measurable, Achievable, [but challenging], Realistic, Time related). Look across the company at the different bonus payments, who receives them? Ensure groups of workers e.g. part-timers, are not excluded except for a genuine reason not based, for example, on their sex or employment status.

Consider whether your pay system is contributing to the problem.

Organisations may have different bonus schemes for different kinds of workers, manual/non-manual for example, or collective agreements covering different groups. It is sometimes hard to compare different groups or realise the impact of certain allowances on individual pay. How many systems do you have? Have you looked at jobs across the whole organisation?

Under your pay system, what does the employee have to do to get the bonus? Do the employees know what they have to do? The more complex and less transparent the system is, the more vulnerable it will be to pay inequities.

Consider whether the people awarding bonuses need any training in avoiding pay inequity.

The element of discretion in awarding a bonus is likely to be the most vulnerable to sex or other bias. Managers don't always realise the risks involved when they are given the discretion to award bonuses. Training in how equality issues affect pay and how to avoid discrimination should be given to all those involved in allocating bonuses, setting targets, making discretionary payments, monitoring and reviewing the bonus scheme. You may also wish the people involved in making pay decisions to be trained in the whole range of pay equality issues, including race and disability. Send them on a course or get professional advice e.g. from ACAS.

Transparency is a key feature of tackling equal pay problems.

A transparent pay system is one where employees understand not only their rate of pay but also the components of their individual pay packets. A transparent pay system avoids uncertainty and perceptions of unfairness and reduces the possibility of individual claims.

Explain the system to the workers so everyone understands the system.

The reason why one job attracts a bonus and another does not, or why one employee gets a bonus and the other does not, should be clear to everyone concerned. The way in which the bonus is calculated should also be clear.

Make sure that decisions on bonuses are properly documented.

It makes good business sense for employees to understand why they are paid as they are. It is also good risk management, because if you should ever be challenged in an employment tribunal, documentation will be essential. Properly documented decisions will enable you to explain your reasons.

Put right any pay inequities in bonus payments affecting a protected group

If there are gaps in pay related, for example, to gender, disability, ethnicity or part-time status for which there is no genuine reason you will need to provide equal pay for current and future workers.

About the Equal pay in practice checklists

Whilst every effort has been made to ensure that the advice given in this note is accurate, only the courts and tribunals can give authoritative interpretations of the law.

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