Performance Related Pay - types and how to document legally
Mon 8 January 2024
Performance-related pay (PRP) is a widely used form of compensation that rewards employees based on their individual or team performance. It is a way for employers to motivate and retain employees, and to align their pay with their business goals.
If you need legal advice on incentivising your employees with performance related pay, we can advise and draft the necessary documents to protect your interests as employer. If you are involved in a dispute about performance related pay, we are experienced in advising whether you are employer or employee. Please call or email and 1 of our employment law specialist lawyers can advise.
Types and Forms of PRP
The most common types of Employment Related Pay are :-
- Bonuses - A bonus is a lump sum payment that is made to employees in addition to their base salary, often based on their individual or team performance.
- Commissions - Commissions are a percentage of the revenue that an employee generates, and are typically paid to sales staff.
- Share options- allow employees to buy shares in the company at a discount, which can provide them with significant financial rewards if the company's stock price rises.
Which Industries or Sectors Use PRP?
PRP is used in a variety of industries and sectors, including sales roles to motivate employees to meet their sales targets, marketing,to reward employees for achieving marketing goals, such as increasing website traffic or brand awareness and finance, staff such as targets for reducing costs or increasing profits.
Performance related pay is also common in the technology sector, especially in the form of share options for start ups and fast growth businesses.
Individual PRP vs. Team-Based PRP
PRP can be either individual-based or team-based. Individual-based PRP rewards employees based on their own performance, while team-based PRP rewards all members of a team based on the team's overall performance.
Legal Risks and Legal Work
Employers who want to implement some form of performance related pay need to be aware of the legal risks involved, such as:
- Discrimination - employers must ensure that their PRP schemes are not discriminatory, and that they do not unfairly favor employees based on their protected characteristics, such as race, sex, or disability.
- Unfair dismissal - employers must ensure that their PRP schemes are not used as a way to indirectly dismiss employees, such as by setting targets that are impossible to achieve.
- Breach of contract - if an employee's contract of employment specifies that they will be paid a certain amount of PRP, and the employer fails to pay them that amount, the employee may bring a breach of contract claim.
Planning and Documents Needed
To minimise legal risks, employers should carefully plan their PRP schemes and ensure that they are:
- Transparent - employees should be informed about how their PRP will be calculated and how their performance will be assessed.
- Objective criteria -, such as sales figures or customer satisfaction ratings.
- Non-discriminatory -schemes should not unfairly disadvantage employees based on their protected characteristics.
Employers should have the following key documents in place for their PRP schemes:
- PRP policy: A PRP policy should outline the employer's PRP scheme in detail, including the criteria for payment and the process for assessing performance.
- Performance appraisal forms: Performance appraisal forms should be used to assess employees' performance against the criteria set out in the PRP policy.
- PRP records: Records should be kept of all PRP payments made to employees, including the amount of the payment and the basis on which it was calculated.