It is common for companies in Mexico to compensate their employees through bonuses correlating to their performance and/or results. It is very important that these bonuses are correctly regulated and documented. They should be sporadic and variable in amount in order to avoid them being considered as part of the employee’s base wage. This is essential for cases where possible indemnification for unjustified dismissal could be paid.

Since the Federal Labor Law does not regulate bonuses tied to performance and/or results as the ones mentioned above, it is important to implement a policy duly executed by any employee entitled to such bonus payments. Additionally, such companies should grant a bonus payment only when the employees satisfactorily meet the previously established guidelines, thus making the bonus payments a sporadic and variable incentive. These types of bonuses should not be used to cover salaries, periodic and/or mandatory payments from the company to the employees because such could easily be mistaken as benefits and not as incentives.

In addition to having well-established policies on bonus payments, employers should establish the terms of possible bonus payments in the employment agreement or in an attached exhibit. This will serve the purpose of establishing in a clear and precise manner the conditions when the employee will be paid a bonus. In order to accomplish this, the employer should detail: i) the goals and objectives that the employee must meet, which must be aligned with the economic and operational needs of the company; ii) the deadline or deadlines for the fulfillment of such objectives or goals; iii) the amount or percentage of the bonuses; and iv) the frequency of such bonus payments. It is important to specify in the employment agreement that failure to meet the goals and/or objectives set forth in the agreement will mean the employee will not receive any bonus payments. This should be specified in order to emphasize the variability and uncertainty inherent in bonus payments.

In summary, the payment of bonuses tied to performance and/or results should be properly regulated and documented. If properly instituted and managed, this could a very effective tool for a company to increase the productivity and performance of its employees and, in the end, benefit the company as a whole.