Options for payment of bonuses

Wednesday, 25 May 2016 00:00 - - {{hitsCtrl.values.hits}}

The employer employee relationship improves when bonus is paid in addition to other payments (Salary, Overtime, EPF, ETF, Retiring Gratuity). Employees would feel that the profit earned by their institution is shared with them. When bonus is not paid, frustration arises which will result in work stoppage, prolonged strike, etc.

It is always better for the management to explain the basis of bonus payment and also the circumstances which had lead to reduced or non payment of bonus. There are four main bases for bonus payment.

1.Fixed Bonus

It may be one month or more but it is fixed. This is a guaranteed payment even when the company is incurring losses but frustration could arise amongst the staff, when the company is prospering. Further a loss making company might go for retrenchment or even liquidation due to continuing losses.

2.Profit Sharing Bonus

In this case bonus is paid only when adequate profit is earned, but it need not be in direct proportion to profit. For example if the profit is doubled, bonus could increase to 1-1/2 times and the management may allocate extra funds for future improvement of the business.

3.Performance Bonus

This is a good system i.e. when targets are reached, (Sales, Production Profit etc) bonus is paid accordingly. Normally employees prefer Sales or Production Target Performance, as they may feel that the profit is reduced due to management inefficiencies (over payment to directors, senior executives, wastage etc)

4.Attendance Bonus

An employee who is having a good attendance record will receive extra bonus. Sometimes, non utilisation of leave facility (privilege, medical) is considered as a qualification. This will result in overworking which in turn affects the health of the employee and therefore this leave pay system is not advisable.

In Japan, employers should or permitted to let employees work overtime exceeding a limit. In Sri Lanka labour laws are not that strict in this matter. It is better to introduce this early. At present there is a requirement for limited liability companies to declare 10% divided (minimum) on profits after due adjustment for capital programs.

This basis could be adopted for bonus payment as well. Dividends have to be declared (after tax) to satisfy shareholders. Bonus payment which has to be declared out of profits before tax will satisfy the workers who have contributed towards the success of the company.

S.R. Balachandran BSc.FCA.FCMA