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Why Neil Woodford’s experiment could impact your workplace

Gary Freer
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Even if you've received a bonus year in year out, courts are very unwilling to challenge employers' decisions to cut them (Source: Getty)

Bonuses are disappearing from the City, and not necessarily because the firms offering them have suffered poor financial performance.

Senior figures in the fund management world, most notably Neil Woodford, have decided to scrap bonuses in their firms, challenging the conventional wisdom that they are necessary to incentivise employees to perform.

The argument goes that bonuses are ineffective at influencing employees’ behaviour and that they should just get a pay rise instead.

Read more: Star fund manager Neil Woodford lambasts short-termism in the City

This is a bold move, not least because the bonus culture is so deeply entrenched in the financial services sector both in the City of London and across the world. However, there is, as Woodford has pointed out, a growing body of academic research that supports a change of approach.

Types of bonuses

Bonuses come in many shapes and sizes. At one end of the spectrum is an arrangement whereby an employee keeps a proportion of any profit they generate, according to an agreed formula. He or she is given a financial target, which they then try to reach. At the other end, an employee is rewarded after the close of the bonus year by being paid a discretionary sum which may take into account factors which are not purely financial – such as how well the employee has helped others to succeed.

It is the first type of bonus, still common in the City, which has been identified as encouraging self-centred, short-term, greedy and, in extreme cases, unethical and even criminal behaviour. Indeed, such a system assumes employees will be entirely self-centred, and that employers should harness that attitude to maximise the income they generate.

By contrast, the other type of bonus allows scope to reward performance that is conscientious, unselfish and makes the workplace both happier and more efficient in the short and longer term.

There is some evidence that this works much better. By the same logic, scrapping bonuses altogether might even be more effective – so the Woodford experiment will be closely watched.

What it means for you

So where do you stand legally if your employer reduces your bonus or scraps it altogether? The first thing to do is to dig out a copy of your contract and see what it says about your bonus.

Most employment contracts will give the employer lots of scope to change or withdraw bonus arrangements at the end of each bonus year – and even if it says that you are entitled to participate in a bonus scheme, an employer will probably design that scheme so it has a lot of discretion to decide what your bonus is going to be.

In making that decision, it doesn’t have to act reasonably, just rationally – and there is a big difference. Particularly in banking sector cases, the courts have shown themselves reluctant to interfere with how an employer has operated its bonus schemes.

But what if you were paid bonuses at a certain level for several consecutive years? Are you entitled to expect that this will continue? Almost certainly not – and again, the courts are very unwilling to allow such claims.

In the end, questions over bonuses boil down to trust and economics. If you are unhappy with your remuneration, and no longer trust your employer to treat you fairly, you can go elsewhere. If you are doing a good job, any employer worth working for will make it worth your while to stay.

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