Salaried Member: Disguised Salary: Bonus
It is a characteristic of a true partner in a business that he or she receives a share in the profits of the business. However, many individuals who are employees also receive profit-related payments which may be described as bonus or by some other label. The definition of Disguised Salary is intended to draw a distinction between amounts which are realistically a share of profits and other amounts such as those which are fixed or remunerate individual performance.
This example looks at bonuses and remuneration committees.
J works for the ABC LLP. He will receive a salary of £100,000 plus a bonus determined by a remuneration committee, at their discretion.
For the purposes of this legislation, the question is about the terms governing the remuneration committee’s exercise of its discretion in determining the bonus payable.
If the bonus paid is genuinely a share of the profit of the business, it will not be considered as Disguised Salary.
In this case, more information is needed to determine whether or not his award is determined as an additional share of the overall profits of the firm. What are the terms of reference for the committee?
If the bonus is an additional share of the overall profit of the business, the next question is how realistic is it that any profit share will be 25% or more of the fixed salary of £100,000 (such that less than 80% of the total rewards will be Disguised Salary). As stated above, those rewards that are unrealistic and are unlikely ever to be triggered are ignored.
For guidance on when something arises as a reward for personal performance see ESM61055.