More and more companies are deciding to implement a remuneration system based on performance within the scope of their remuneration policy. This variable remuneration system links each worker’s performance with the organisation’s targets, individual targets the company sets and certain results or profits being achieved.

By companies endeavouring to improve their employee’s remuneration without this having a serious impact on their accounts, an extremely feasible option is to implement a variable remuneration system, in addition to the one stipulated in the contract, which incentivises and improves the workers’ motivation and commitment.

However, even though it seems this type of remuneration only has good points, its lack of regulation and the fact that it could be left to the free discretion of only one of the parties could result in certain problems for the company.

It is hence important to take the following aspects into consideration:

The targets of the variable remuneration system must be set and the employees must be able to achieve them

Failure to set clear targets would prevent the workers from being able to meet the conditions for them to receive the bonus, a typical example of variable remuneration, implying that this remuneration system would have no meaning.

Therefore, wrongly setting targets, or not providing them at all, has been one of the claims that has been the most often filed in the Spanish courts.

Among the court judgements, most of the judgements have implied a decision to rule that, due to the failure of companies to set clear targets or even in cases when targets are set that cannot be achieved, i.e. impossible to fulfil, the workers are entitled to be paid the bonus in full regardless of whether or not they have achieved the stipulated targets.

Therefore, since the courts have considered the employer is responsible for clearly and precisely setting and determining the targets and that abstract specification is not allowed according to which it could be deduced that meeting the condition is left to the company’s unilateral discretion, in order to avoid future problems it is crucial to determine a precise variable remuneration system that meets all the requirements stipulated from a case law standpoint. The proposed targets that, in addition to being clear and precise, must hence be able to be achieved, duly identified and notified to the workers.

Must contributions to the social security system be paid for the amounts received as variable remuneration, i.e. bonus? How must this be done?

Contributions must obviously be paid to the social security system for the amounts received as variable remuneration or bonus, but how must this be done?

A common mistake made by companies when paying contributions for these amounts is that they include them in the pay slip of the month when the bonus is paid, which is a mistake because that is incorrect unless the amount was received in a period shorter than such monthly period.  

The Royal Decree that approved the regulations on contribution and settlement of other rights to the social security system stipulates that the amounts paid with a due date longer than one month must be paid proportionally in the contributions over the 12 months in the year because otherwise, in other words, by paying the contribution in a specific month, that would imply a significant increase in the contribution base and could mean that contributions are not paid for the part of the bonus that exceeds the maximum contribution base.

Moreover, it could also influence the benefits requested by the worker in which the regulatory base of the benefit is higher than the correct base.

Must the variable salary be taken into consideration for the purpose of calculating severance pay?

The answer to this question is clear: Yes.

Doctrine of the Supreme Court has stated that the bonus or variable salary must have been payable in order to be able to count it for the purpose of severance pay.

In this respect, the Labour Chamber required that the obligation must be liquid at the time of the dismissal but that has not prevented many courts from considering that, if the dismissal takes place when the worker’s bonus is payable but he/she has not yet received it, he/she would also be entitled to its inclusion in the severance pay because, in these cases, the dismissal by the employer could be considered a corporate “strategy” to avoid paying it.

Therefore, before any dismissal is decided in which payment of the full bonus could be claimed in the future, it is important to know, not only whether or not the bonus is payable to the worker at the time of his/her dismissal, but also the period for its payment.

In fact, there are several issues to take into account when we are planning to implement a variable remuneration system; hence it is important to obtain good preventive and corrective advice on labour matters.