Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
Incentive compensations can be structured as either:
- a statutory bonus payable to employees who earn up to Rs21,000 (approximately $296) per month under the Payment of Bonus Act; or
- a contractual bonus payable to employees, at the discretion of the employer.
The amount of incentive compensation varies depending on a multitude of factors. While a statutory bonus payable only to the employees identified above ranges from 8.33% to 20% of the annual wages of those employees, a contractual bonus which is generally payable to executive employees varies based on the financial performance of the organisation and the tenure and performance of the executives entitled to such a bonus.
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
A statutory bonus payable to employees who earn up to Rs21,000 (approximately $296) per month under the Payment of Bonus Act is capped at 20% of the employee’s annual wages per financial year. With respect to a contractual bonus being paid to key managerial personnel, the amount of the bonus must be within the overall restrictions on managerial remuneration prescribed under the Companies Act.
The amount of tax payable by an executive on the incentive compensations that they earn will depend on the overall remuneration of that executive. The government has formulated tax slabs, which determine the amount of tax payable by executives, with executives earning higher remuneration falling within a higher tax slab and being subject to higher taxation under Indian income tax law.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
A statutory bonus payable to eligible employees under the Payment of Bonus Act cannot be deferred. Once accrued, the bonus must be paid within eight months from the end of the financial year in which it has accrued. However, a contractual bonus payable to executives is generally discretionary and may be subject to limits, deferrals and conditions (eg, completion of a specified tenure of employment or achieving certain pre-determined targets).
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
Since contractual incentives for executives are discretionary, there are no limits with respect to granting them to an individual or a group of employees, provided that the total quantum of cash incentives payable to an individual does not exceed the limits on managerial remuneration prescribed under the Companies Act. In contrast, a statutory bonus must be mandatorily paid to an eligible employee who:
- earns up to Rs21,000 (approximately $296) per month; and
- has been employed at the organisation for a minimum of 30 days in the given financial year.
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
While it is customary for organisations to grant contractual incentives to their executives at the end of each financial year, there are no statutory provisions that entitle an executive to such an incentive. Instead, they are purely discretionary and therefore rebuttable. The granting of contractual incentives depends on several conditions, including:
- the financial performance of the employer;
- market conditions; and
- the tenure and performance of the executive.
Senior executives may be entitled to additional contractual incentives as well.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
While the type or amount of the contractual incentive provided to an individual would not affect the nature of contractual incentives awarded to other executives in the organisation, executives within the same band or designation in an organisation are typically granted similar incentives. Additionally, in most circumstances the terms of such incentives are confidential.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Given that contractual incentives to executives are discretionary, an employer can mandate the repayment of such an incentive in certain circumstances. For instance, a signing bonus paid to an executive at the time of commencement of services may need to be repaid if the executive resigns or is terminated within a short period.
On the other hand, while the Payment of Bonus Act does not mandate the repayment of a statutory bonus under any circumstances, an eligible employee may be disqualified from receiving a statutory bonus if they are found guilty of fraud, theft or misappropriation of the employer’s assets, or are dismissed from service for a sexual harassment offence.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
Contractual incentives can be structured in such a way that payment is made subject to the executive remaining in employment with the organisation until the payment date or to provide exceptions to this. However, a statutory bonus under the Payment of Bonus Act must be paid to employees earning up to Rs21,000 (approximately $296) per month within eight months from the end of the financial year in which the bonus has accrued, and cannot be made subject to the employee continuing to be employed at the organisation until the date of payment.
Law stated dateCorrect on
Give the date on which the information above is accurate.
31 October 2019.