Reader Question – Should I pay a prorated bonus to an employee who resigned ?

Should I pay a prorated bonus to an employee who resigned

Marta one of my readers just wrote to me asking me for advice on the following situation :

“I’m HR Manager for a small Oil & Gas Contractor. Recently,  I’ve been facing quite difficult situation and need second opinion. We have a Project Manager leaving the company in June (resignation) and here comes the issue – should we pay him pro-rata bonus? The contract clearly mentions that the company may pay annual bonus based on the performance at the end of the year (December). So far we have not paid pro-rata bonus (and I have not experienced such a practice in other companies), however he is not happy about it.
What is your experience in this situation, or what is the common practice?”

Here’s my view :

You don’t HAVE to pay a prorated bonus to an employee who resigned, unless this is specifically written in the employment contract, or published in the official bonus guidelines in place at your company.

To be honest it shouldn’t be your problem if the employee is not happy, he is the one who chose to leave, and I am sure that he knows what the practice has been in your organisation so far. (Also, with the slow-down in the O&G industry, attrition rates are going down, and companies are looking at ways to cut or control cost, so even companies that may have paid prorated amounts in the past might not be doing it at the moment, especially for people who resign). 

Most companies pay bonuses about 3 or 4 month after the close of their fiscal/performance year, for reasons linked mostly to financial accounts auditing approval arriving 2 or 3 months after year-end close, and subsequent Board approval for bonus payment coming in the same or the following month. For companies with fiscal year = calendar year, it means that bonus payment is done in March or April of the following year. 

For informal benchmarking purposes, in 21 years of C&B experience as in-house expert and now an independent consultant, I have NEVER seen any company paying a prorated bonus for someone who has resigned and not even performed half of the performance year – in any industry.

Cases when the company may pay a prorated bonus to an employee who resigned

A case I’ve sometimes seen is companies who agree to pay the bonus to an employee who has resigned, provided he/she has worked the full year. So when March/April Year+1 comes, the employee whose last day of work was after January 1st of Year+1 is eligible to a full bonus payment. 

The more traditional companies work on the basis of “you have to be present on the day of bonus payment in order to be eligible to receive your bonus”. If you are based in the Middle East and not working for a multinational, then probably your company is following one of these two patterns above. HOWEVER, I have seen most of the more progressive companies pay a prorated bonus for “good leavers”, based on conditions such as :

  • employee is a good leaver (ie true resignation from someone with good performance history, (sometimes) employees being laid off for economic reasons not performance-related, employees who have to retire, employees who have to be dismissed because they become unable to work etc,
  • employee has worked at least 3 full quarters of the performance year – this was the usual amount of presence required to trigger potential eligibility to prorated payment. (ie, last day of work is after the cut-off date chosen by the company even if the resignation took place before the cut off date – so you have to take into account the notice period as well to determine eligibility, whether the employee worked or not (“garden leave”) during the notice period,
  • upon or before departure, the manager does a performance appraisal and the employee is not deemed under-performer.

+ If the conditions were met, payment was usually paid at the same time as other employees, but rarely when the employee is leaving – this way if the financial situation of the company goes down and there is a bonus freeze, leavers don’t get more than employees who stay with the company.

+ Also, a significant minority of these companies (maybe 20 to 25% of them) paid less than 100% of the prorated performance bonus. For example if the employee had worked 75% of the calendar year, he/she may receive 80% of the prorata, or 0.8*0.75 = 60% of full year-payment.

In my experience, these more progressive companies tend to be multinationals, or in the financial services, O&G, high-tech, pharma industries…. as these industries have HR practices tending to generally be more aligned to international best practices.

Please note that the situation may be a bit different for employees on sales incentives, especially if the payment schedule is monthly or quarterly. In that case, there are often binding rules within the scheme to pay the incentive on prorated basis of achievement. So you’d have to get back to your sales incentive plan documentation.

I’d be interested to hear about such practices from my readers, so if you have a specific experience to share, please leave a comment below !

Print Friendly, PDF & Email
Share the Knowledge !
Get Free Updates

Comments

  1. Philip Mathew says:

    My reply is in reference to the subject of this article.

    I don’t agree to bonus being paid . Especially as the incumbent holding the significant role, don’t find the rationale to do so. It also sends a wrong message throughout the hierarchy.

    • Philip, could you elaborate please on why paying a prorated bonus “sends a wrong message” ? Is it in a specific case when the person has not worked for for the full fiscal year, or do you think about it as a more general rule ? And also, how does the role of the incumbent influence your thinking ? I’d like to understand what drives your point of view 🙂

  2. Bonus is as reward based on company and/or individual performance over a time period.On what basis should bonus not be paid when the employee was present in the bonus period?The payout and non-payout should follow consistent principles and cannot be tweaked on the basis of hierarchy or any other factor that does NOT determine the payout or non-payout of bonuses

    • Hi Sulaxmi,

      Well you could have a rule to not pay if the person has been present less than a quarter in the year (new hire), resigned before the last quarter (leaver), or if the person is an under-performer, or if the company did not reach a specific target, or in special circumstances as per Board discretion.

      You are right, the main principle here is that the rule is clear and applied consistently, not on an individual basis.

      • Yes, agree. In quite a few cases, the company performance factor is baked into the bonus accrual formula. Generally, at least a full quarter in the company is considered as eligibility to receive bonus payout.

Speak Your Mind

*