The study (the Truth about Bonuses) by the University’s School of Economics involved subjects either being paid a bonus or fined depending on their performance in certain areas.  The results showed that the joint earnings of employers and workers were almost 19 per cent higher when fines were handed out than when bonuses were paid. However, while employers were better off when fines were introduced, workers earned less than in the scenario without fines.

Alternatives to bonuses

So what does work?  I suspect it depends on who you ask.

Employees (especially those in the, ahem, financial services sector) will probably say cash is king, and when it comes to it, a bonus will do nicely, thank you very much.  Now where is the Ferrari showroom?

Employers will often take a longer term approach to incentives and will often prefer employee share schemes and options.  These have the benefit of being tax efficient and of promoting long term commitment to the business since employees will benefit from future growth.

I’ve yet to come across anyone offering employee fines as an incentive and, if my boss is reading this, I am not sure that it would go down well in practice.

If you would like to discuss employee incentives for your business please contact me (for a discussion of tax), or Emma Cameron in our corporate team.

Will staff lose out on share scheme payouts?

Q. In the past, I have offered share schemes to my staff, most of which mature at their retirement age. However, I have on occasion dismissed staff for poor performance or conduct issues. Now we are also looking at the abolition of am statutory retirement age? Could any of these issues mean staff should be deprived of a share scheme payout?

A. From the 1st October 2011, it will not be possible for employers to automatically retire workers at the age of 65 without facing claims for unfair dismissal or age discrimination. Many share schemes reward employees who are considered “good leavers”.

Difficulties will arise if older employees are dismissed for reasons of capability or conduct. Dismissal on such grounds could deprive older workers of the right to exercise valuable share options on the basis that these workers no longer constitute “good leavers”. 

Amendments to schemes are required where employees could lose the right to exercise share options if they cease to be employed by virtue of retirement through age 65. The wording of share schemes should be amended and refer to the employment of the employee ceasing, and make no reference to retirement due to age. 

To protect the employer, provision can be made to the effect that no options are exercisable in the event of the employee being dismissed for gross misconduct.

Michael Delaney is an employment partner at Matthew Arnold & Baldwin, a law firm.

If you have any questions or concerns about how the abolition of the default retirement age will impact on your company and/or your company’s employee share scheme or other employee benefits, please contact me at michael.delaney@mablaw.com.

The Government has also signalled its intention to phase out the default retirement age from 1 October 2011. However, under existing legislation, employers must serve six months’ notice on their existing employees who are approaching 65 years before 6 April 2011, if they wish to retire them. After that date, it will no longer be possible to serve notice of retirement. From 1 October 2011, retirement will no longer be an automatic fair reason for dismissal. Employers wishing to dismiss or retire an older worker will have to rely upon a fair reason set out under s.98 of the Employment Relations Act 1996, namely capability, conduct, illegality or some other substantial reason.

One of the difficulties employers face with an aging workforce is the cost of providing benefits which are not based on length of service and include health cover, income protection, death in service, critical illness and life cover. It will be not be justifiable treatment to withhold the benefit on the basis of increased cost and to do so could leave an employer facing claims for age discrimination.

Employers also need to look at share schemes and how they deal with the departures of older staff. Since, if the dismissal of older staff is by reason of capability, conduct, illegality or some other substantial reason, it could deprive an employee of valuable share options. Employers should re-examine share documentation and ensure such documentation enables the employer to dismiss older workers without them losing valuable share options.

We have presented this talk to a group of HR directors, managers and providers of employees’ benefits at a conference in the City of London on 12 November 2010.

If you would like further details, please contact me at michael.delaney@mablaw.com