Performance based bonus package contract

[pegasus70]

Hi all

I have been asked to put together a clause for a managers contract to include a bonus incentive scheme. It is to be based on target KPI's.
We are a small organisation based in WA.
I haven't created one of these before and was looking for some help on what wording is best and what to avoid?

[Job Media]

It's impossible to give any specific advice without knowing more about your business.

However, to start with you need to think about the KPIs carefully, because some KPIs can drive behaviour that wasn't anticipated and this can be detrimental to the business in the long term.

So you need to think about the different ways in which a KPI target can be achieved and what behaviours this might drive.

For example, a KPI related purely to revenue or gross profit can be dangerous if it has no relation to profit or margins, because you can discount your products or services to increase sales, but actually be losing money. Cost of sale is important!

Whereas a KPI related purely to profit could be counter productive in the long term because it may drive excessive cost cutting which stymies business growth. So you get a spike in profit in the first year and the business falters the following year because marketing and business development has been cut.

These things need to be carefully balanced. These are of course just a couple of examples which may not be relevant to the job in question.

If you can give us a little more information about the responsibilities of the managers job and what you want from them I could possibly provide some ideas - but remember this is a public forum, so keep it generic

[pegasus70]

Thankyou

The position is within small organisation which provides labour hire to mining companies as well as break down repairs for mobile plant in the Pilbara region in WA.

The KPI's are based around expansion of the business and increasing its value.

[Qld IR Consultant]

Formula I use for such a clause it just a simple step process:

Reiterate the requirement of clause (As part of the role there is a....)

Outline expectations (KIP's)

How their progress will be measured/monitored

Consequences of achieving or not (basically you get x bonus or if you fail you getting nothing)

In all honesty the clause in the agreement is just the trigger mechanism for the backdoor process you will need to undertake to measure etc the performance.

Don't get too creative in the wording or you may find yourself in a position of a claim on the basis the manager thinks its an expectation that he gets it regardless of reaching the KPI's....seen that too many times.....

[Tiger]

I actually would not include a detailed clause like this in an employment contract.
I agree with other writer's suggestion you really need to think this through in terms of KPIs, behaviours etc. you want.

With respect, if you are new to this, that is another reason not to include it. What I am saying is that employment contracts can often be used in court and without obtaining legal advice, I encourage caution that you don't include something which could come back to haunt you!

You, the org, the new manager need time to agree on just what the KPIs will be, how they will be measured and what formula is to be applied to arrive at a bonus. This is likely to vary from year to year because business fluctuates - there will be good years and bad years.

My advice is tosimply include a generic type clause which states your intent but be careful to allow an out (there may well be years when the company just can not pay a bonus and simply state that the details will be provided after the individual starts and will be reset each year. In other words you have a Compensation Plan which is revisited each year dependent on organizational factors which is signed off by both company and employee each year. This will give you the flexibility to make changes as the business evolves (nothing is stagnant in business these days).

I reiterate though, do seek advice on this one. It's ok if you haven't done it before, getting advice from an expert ( whether it is a remuneration specialist or legal) is how we learn.

Good luck

[pegasus70]

Thank you all

I have included a general term in the contract which states that you need to refer to the attached KPI sheet and we are getting the KPI's drawn up by lawyers.
Safest way out I think

[Tasman McManis]

Hi Pegasus70

I agree with the advice around not including a specific clause on incentives in your contract of employment. When I am assisting clients with the design of their incentive/STI/LTI plans I often provide them with a separate document that sets out the details of how the plan will work, who can amend etc and have it signed by both parties before the plan year commences.

This process is usually used for detailed sales plans not for a basic bonus/KPI plan. A simple one or two page outline with the KPI setting process could well be adequate for your needs.

So, I would recommend that you use a good rem consultancy rather than a lawyer to assist you with this process as it will probably be cheaper and you will be dealing with someone who has experience with these type of activities. This is not an area that many lawyers and for that matter HR professionals have experience. Regards Tasman