Designing a bonus scheme in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
Bonuses are discretionary or contractual payments on top of base pay, and designing one that is fair, compliant and actually motivates staff requires more thought than simply picking a percentage. Here is how to build a scheme that holds up legally and does what you intend.
Discretionary versus contractual bonuses
The distinction matters enormously. A discretionary bonus is one the employer retains genuine freedom to grant, vary or withhold — but the word "discretionary" in a contract does not automatically make it so. Australian courts have found that once a pattern of payment is established, employees may have a legitimate expectation of receiving a bonus even without a written entitlement. If you want genuine discretion, document it clearly, exercise it inconsistently from time to time for defensible business reasons, and avoid language in offer letters that implies the bonus is a certain part of total remuneration.
A contractual bonus, by contrast, triggers enforceable rights. If the criteria are met, you must pay. That is not necessarily a problem — clarity can reduce disputes — but you need to set conditions you are genuinely prepared to honour.
Setting meaningful performance criteria
Vague criteria ("contribution to company culture") create two problems: employees cannot predict or influence their outcome, so the motivational effect is weak; and managers face challenges justifying differences in payment, which can lead to discrimination or unfair dismissal claims.
Effective criteria tend to be:
- Measurable — revenue targets, gross margin, project delivery milestones, customer satisfaction scores with defined thresholds
- Within the employee's control — avoid basing individual bonuses entirely on company-wide outcomes the person cannot affect
- Time-bound — tied to a quarter, half-year or financial year with a defined measurement date
- Documented in writing before the period starts — changing the goalposts mid-year is a fast way to lose trust and, in some cases, attract legal risk
For team-based or company-wide schemes, a profit-share or gateway model is common: the fund only opens if the business hits a minimum threshold, then individual allocations depend on role or seniority. Be transparent about how the fund is sized so people understand why a strong personal year might still produce a modest bonus if the business struggled.
Tax and superannuation treatment
Bonuses are ordinary income and subject to PAYG withholding in the pay run in which they are paid. Because a lump-sum payment can push an employee's marginal rate above their usual withholding rate, the ATO has a method for calculating the correct withholding on a bonus — broadly, you annualise the bonus alongside the regular income and apply the marginal rate to the combined figure. Running this through compliant payroll software avoids under-withholding and a tax surprise for the employee at return time.
Superannuation is payable on bonuses if they form part of ordinary time earnings (OTE). Whether a bonus is OTE depends on its character: a bonus paid for ordinary work performed is generally OTE, while a bonus paid for working overtime is not. If your scheme rewards day-to-day performance rather than extra hours, treat the bonus as OTE and apply the Superannuation Guarantee — currently 12% — on top. Getting this wrong creates an SG shortfall, which attracts the Superannuation Guarantee Charge, penalties and interest.
If an employee has a HECS/HELP debt, the bonus adds to their income for the year. Your payroll system should factor this in and withhold the additional repayment amount.
Every bonus payment must be reported through Single Touch Payroll at the pay event. There is no separate lodgement — STP handles it — but the timing matters: do not sit on a payment to push it past 30 June if the employee's tax position and your cash flow make that month the right time to pay.
Handling departing employees
This is where many bonus schemes break down. A scheme that says "you must be employed on the payment date to receive the bonus" is enforceable in most cases, but it needs to be drafted carefully. If an employee resigns the day before payment after meeting every target, a court may still award the bonus depending on how the contract is worded and whether the employer's conduct was unconscionable.
Best practice is to distinguish between:
- Employees who resign (typically forfeit, if the contract says so clearly)
- Employees made redundant (consider a pro-rata entitlement — the National Employment Standards redundancy scale applies to base pay, not bonuses, but goodwill and legal risk both favour some payment)
- Employees dismissed for cause (forfeiture is more defensible)
State this clearly in the scheme document, not just in the employment contract.
Reviewing the scheme regularly
A bonus scheme designed for a ten-person team can become dysfunctional at fifty. Targets that were stretching at one revenue level may become automatic at another, turning a performance incentive into a de facto salary top-up. Review criteria annually, communicate any changes before the new measurement period starts, and — if you are removing or significantly reducing a scheme — take employment law advice first, because changing remuneration terms without consent can constitute a repudiation of contract.
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