Why year-end bonus matters to a first-time founder
Bonuses affect cash, payroll tax, employee expectations and retention. Vague promises can create disputes or unintended contractual obligations, while opaque decisions can undermine trust or produce discriminatory outcomes. A founder should define affordability, eligibility, measures and approval before staff reasonably expect a payment.
Examples of year-end bonus
A company sets aside up to 8% of eligible salary if annual recurring revenue reaches £1 million and the employee meets documented goals. Revenue reaches £950,000, so no formula bonus is due. The board separately approves a £500 discretionary award for each employee and processes applicable payroll deductions.
Common misunderstanding
“Discretionary” does not always mean the employer can decide arbitrarily or change terms after performance. Contracts, policies, established practice and local employment law may constrain discretion. A bonus also differs from salary and dividends: it is employment remuneration and usually carries payroll reporting and tax obligations.
When to use it
Design the scheme before the performance period begins. State eligibility, measures, calculation, payment date, treatment of leavers and whether terms are contractual, then check local employment, equality and tax law. Reforecast cash before approval and communicate outcomes consistently, including when targets are missed.