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Employee bonus agreed on %age of net profit

Bonus calculated on %age of company net profit after depreciation. Is this correct?

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Key employee of limited company.  Company director advised employee that he would be rewarded by performance and receive a %age of annual net profits over £100K.  The director did not provide anything in writing and the annual bonus was calculated based on the company net profit AFTER CHARGING DEPRECIATION.  Is this normal practice as employee did not receive any bonus in a number of years owing to the high depreciation charge.  Appreciate any input re this.

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RLI
By lionofludesch
21st Jan 2022 12:45

It entirely depends on the unclear agreement which was made.

Can I throw in "before or after tax" as an additional complication ?

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By RyanTheBeanCounter
21st Jan 2022 12:45

What did your accountant say?

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By David Ex
21st Jan 2022 12:52

snoopys wrote:

Is this normal practice

It’s not normal - well, sensible - business practice to make apparently important agreements verbally.

There is no answer to your question because we aren’t able to access the recollections of the parties at the time the agreement may or may not have been entered into.

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By Tax Dragon
21st Jan 2022 12:52

Sounds like it's normal for the agreement in question.

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By rmillaree
21st Jan 2022 12:53

Generally
There is no such thing as normal IMHO - why would you not have it written down - if its not written down one party is always gonna moan - normally the employee.
Specific extra dangers - what happens if owner starts leasing porsche for him and family through teh book?

Specifically ref depreciation it is an expense so why on earth would the employee simply presume this huge expense doesnt count?

Really both parties are best served revisiting their initial discussions and reviewing what they agreed to see if there has been any misleading going on here. Its bound to grate on employee if the company is making little profit but the owner has given the impression that profits are 100k and they would likely get wad each year!

If employee has simply presumed depreciation isnt an expense then i suspect its tough luck on them.

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By Tax is always taxing
21st Jan 2022 13:44

Generally speaking Net Profit is shown after deducting depreciation. Normal practice would be to have a written agreement detailing how it is calculated. I assume you are the employee.

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By LornaM82
21st Jan 2022 14:05

Net Profit would suggest what is left after all expenses have been taken into account. If it is for bonus purposes I would expect it to be before tax as this is how I have seen it operate in other businesses.

What the employee is looking for is bonus on EBITDA which does not seem to have been part of the conversation.

I agree with most people though, something like this should have been in writing and part of the employees HR file to avoid this situation arising

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RLI
By lionofludesch
21st Jan 2022 14:15

Is net profit before or after the OP's bonus?

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Replying to lionofludesch:
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By rmillaree
21st Jan 2022 14:41

lol - comment of the day :) - probably after the bonus i guess based on teh lack of anything concrete.

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Replying to lionofludesch:
paddle steamer
By DJKL
25th Jan 2022 15:32

That will confuse excel's iteration function.

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By Hugo Fair
21st Jan 2022 15:56

Bit late in the day (in every sense) but I'd take more than one step back from where OP starts (if I was the affected employee):
* Scheme was reward for performance of company (not individual), so how does employee get to monitor this performance each month?
* And if he's not also a director, what voice does he have regarding (many other) factors that will determine net profit?
[It not just a matter of who trusts whom - although that can break down quite quickly - but of whether the reward can indeed be related to the individual's contribution].

And, although I started by saying it's too late to look back, that doesn't mean it's too late to re-negotiate (at least for the future). If the employee really is key, then it's in both parties' interest for him to remain and be motivated.

Oh and it's not just a matter of getting 'it' in writing - the document needs to be specific on method of calculation, authorisation process, pay frequency/method (including tax treatment) and so on.

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By Calculatorboy
22nd Jan 2022 00:31

Are you the real Snoopy ?

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Melchett
By thestudyman
25th Jan 2022 14:59

Net profit is typically after all expenses (including tax, interest, non-cash items which includes depreciation and share option expenses etc...)

Depreciation has to be accounted in the bonus calculation for as per the bonus policy. Whichever way it is looked at, the net profit after depreciation is below £100k so no bonus is payable.

A different question for the question is are the depreciation charges calculated correctly? If they are, then little comeback the employee is. I'm sure there was a reason the director clearly states "AFTER CHARGING DEPRECIATION" and not other measures such as EBIT and EBITDA. Little can be done without a written policy to refer to.

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