Pay smarter, not harder: 3 alternatives to a cash bonus
17 Oct 2023
As 2023 draws to a close, many companies are likely working on their 2024 bonus plans. In a new series of newsletters, we’ll discuss several aspects of setting up a bonus plan, starting with the method of paying out a bonus. In this respect, using the classic ‘generic’ cash bonus can of course be a viable option. However, in this newsletter we’d like to highlight three possible alternatives that – given the cash bonus’ poor ratio between the cost for the employer and the employee’s net benefit – could be more advantageous for employer and/or employee; non-recurring, result-linked benefits, the profit premium and warrants.
The baseline: a cash bonus
As mentioned above, when designing a bonus plan, the ‘generic’ cash bonus is a viable option. It gives the employer a great deal of flexibility, inter alia with respect to setting the targets and determining which (categories of) employees will be eligible to participate. However, a cash bonus is subject to regular social security contributions (13.07% in employee social security contributions; to be withheld from the gross bonus amount and +/- 27.50% in employer’s social security contributions; to be paid on top of the gross bonus amount). As far as the tax treatment is concerned, a 53.50% employee withholding tax will be due and the cash bonus will be tax deductible for the employer. This tax and social security treatment results in a large discrepancy between the cost for the employer and the net benefit the employee eventually receives. There are, however, several alternatives.
Non-recurring result-linked benefits
The non-recurring result-linked benefits – a system introduced by collective bargaining agreement (CBA) no. 90 – are a way of rewarding employees for achieving pre-set collective targets within a certain reference period. Not only the targets must be collective in nature, also the beneficiaries must be determined on a collective basis: either all the company’s employees must participate in the bonus plan or a clearly defined (based on non-discriminatory criteria) category of employees.
As such, the flexibility in terms of determining targets and bonus plan participants is markedly less than our generic cash bonus baseline. However, this is off-set by the way non-recurring result-linked benefits are taxed. Indeed, although specific social security contributions are due on the amounts that are paid out if the collective targets are met (13.07% in employee solidarity contributions; to be withheld from the gross bonus amount and 33% in special employer’s social security contributions; to be paid on top of the gross bonus amount), these amounts are fully tax-exempt up to a maximum of EUR 3,434 per employee per year (indexed yearly, amount for 2023). Moreover, the amounts paid out are also tax deductible for the employer.
This tax treatment means that, compared to a cash bonus, the employee will receive a higher net benefit. As such, it can be worthwhile considering a CBA no. 90 bonus plan, certainly if setting collective targets aligns with your intended bonus strategy.
Profit premium
The system of profit premiums allows for a company to distribute (part of) the profit realised in a given accounting year to its employees in a tax - and social security friendly manner. If a company decides to award a profit premium, it must do so to all of its employees, but can differentiate the amount of the premium based on objective criteria such as seniority, position, etc, by opting for a categorised premium instead of going for the identical profit premium (where each employee either receives the exact same amount or the premium equals the same percentage of each employee’s salary). The total amount of the profit premiums awarded cannot exceed 30% of the company’s total yearly gross wage cost.
Any profit premium amount is exempt from regular social security contributions and income taxes. Only a solidarity contribution of 13.07% and a special tax of 7% will be due by the employee. This means that, compared to our baseline generic cash bonus, not only the employee’s net benefit increases, but the total employer’s cost decreases as well, due to the lack of any employer social security contributions. Do note that the profit premium isn’t tax deductible for the employer. Conversely, the inherent nature of the profit premium can make it a somewhat uncertain proposition: if the company doesn’t turn a profit, there’s no profit premium. In addition, the system’s specifics preclude the employer from e.g. setting individual or collective targets. However, if you can make these boundaries work with (part of) your variable incentive strategy, the profit premium can be a valuable tool.
Warrants
Warrants are quoted call options – i.e. the right to buy or to subscribe to a certain number of shares during a certain period of time and at a certain price – that are acquired by the employer from a financial institution and offered to the employees free of charge. What’s particular about warrants is that the employee can, after accepting the offer, immediately sell the warrants back to the financial institution, thus limiting the risk of market fluctuations.
Using warrants to pay out a bonus offers flexibility comparable to our cash bonus baseline; in the underlying bonus plan, the company can choose to set individual or collective targets (or can award a fully discretionary bonus in warrants), which employees will be eligible and which amounts to award (note, however, that the total amount of warrants an employee receives during a calendar year cannot exceed 20% of the employee’s gross salary for that year). Moreover, this flexibility is coupled with a lower cost for the employer and a higher employee net benefit than our cash bonus baseline. Indeed, although withholding taxes will be due by the employee, the warrants are fully exempt from social security contributions if the employee accepts them within 60 days following the offer by the employer. In addition, the price the company pays to buy the warrants from the financial institution is tax deductible. This combination of flexibility and beneficial social security treatment makes warrants a popular vehicle for the settlement of bonus plans.
For the sake of completeness, note that – although the initial 2023 tax reform blueprint sought to end the above-explained beneficial system of warrants – this ultimately didn’t make it into the actual final tax reform after all, meaning the current system remains applicable until further notice.
Important remark – converting a cash bonus
When talking about alternatives for a cash bonus, it’s important to point out that – if it’s the intention to allow for the conversion of an existing cash bonus into an alternative with a more beneficial social security treatment – the timing will be crucial. We’ll elaborate on this topic in the next issue of this newsletter series.
Conclusion
The above shows that there are several alternatives to a cash bonus, each with its own specific particularities. That’s not to say that there’s never a place for a cash bonus. The first thing an employer should preferably do, is – in the framework of their broader reward strategy – determine the characteristics of the bonus plan they’d like to introduce. This includes inter alia whether they’d like to set individual or collective targets (or would rather opt for a purely discretionary bonus), which employees will participate, what the available budget will be, etc. Based on this framework, the employer can choose which type of variable incentive, or combination of different types, best suits their needs.
If you have any questions regarding the above or are looking for guidance with putting together a bonus plan that’s tailored to your company, don’t hesitate to reach out; we’d love to hear from you.
