Employees who are under a contract of employment are entitled to basic wage payable either, hourly, daily, weekly or monthly. The payment of wages or salary to an employee, is a statutory requirement that is very clearly set out in the Employment and Labour Relations Act, Chapter 366 of the laws of Tanzania, Revised Edition 2019 and the Regulations made thereunder as amended from time to time (collectively referred to as the ‘Employment Act’).
Other than wages or salaries, employers may also pay bonus or gratuity to their employees as an incentive package. However, these are not statutory mandatory payments under the Employment Act (other than in the Income Tax, Chapter 332, Revised Edition 2019 of the laws of Tanzania where they are taxable).
A bonus can simply be defined as an additional element either in monetary or non-monetary form paid in addition to an employee’s basic wage or salary, and is given as a way for employers to recognize and reward employee accomplishments, as shall be explained further below.
Bonuses can either be financial (cash) or non-financial (non-cash) bonus. Cash bonuses can, among others, be in the form of end-of-year bonus, seasonal bonus, holiday bonus and other one-time bonuses. While non-cash bonuses can, among others, be in the form of share options schemes (this is limited to company employees), awards given or presented to an employee for outstanding performance, creativity or productivity and/or vacations paid for by the employer.
The essence of paying bonuses to employees is to increase performance levels, by showing that an employer appreciates their work output both quantitatively and above all qualitatively. In addition, to being a tool of enhancing work performance, bonuses are an essential tool that can be used to retain highly effective staff, and therefore, saving costs of recruitment and training new employees.
In Tanzania, the Employment Act is the primary piece of legislation governing employment and labour matters. However, it does not expressly provide for issuance to employees of bonuses or similarly, matters of incentives, commissions and other compensation schemes outside the ordinary basic wage or salary of an employee. As a result, payment of bonuses to employees is a standard practice in large and medium corporate circles in Tanzania, and is discretionary at the option of the employer.
Payment or allocation of bonuses although discretionary, is not automatic, as it is pegged on certain criteria, some of which include, (1) performance; (2) service qualitative indicators, such as, client retention and relationship; and/or (3) quantitative indicators, such as, increasing the annual turnover and/or increasing shareholder’s profits.
Many large and medium size corporate entities in Tanzania are known to pay bonuses and other incentives to their employees more frequently than small business or medium sizes businesses (‘SMBs’). The common argument for this is that, unlike SMBs, these corporate entities make more profit turnovers and are more financially stable to pay bonuses and/or incentivize to their workforce, to obtain premium performance and to attract a highly effective workforce.
On the other hand, most SMBs are not willing to pay bonuses to their employees due to their meagre turnovers compared to the large corporate entities. For them, the argument is always that, business is not doing so well, no profits are being made, or simply said ‘it is not necessary or a requirement to pay an employee anything over and above his or her basic wage or salary’. Unlike a corporate entity that operates while taking into consideration the benefits of its shareholders and other stakeholders including employees, most SMBs operate purely on individual interests of the business owners or founders, without much regard to employees who put in the time and effort to the success of such business.
For employers (both corporate entities and SMBs) seeking to increase their workforce productivity and maintain a highly effective workforce, it is best to consider using bonus incentive schemes to obtain the desired results.
The following tips can help employers in the process of creating a bonus incentive packages:-
Create a bonus incentive policy or scheme. A bonus policy sets out different aspects in terms of the bonus payment to employees, such as the type of bonus, criteria for payment of bonus, eligible employees for the bonus scheme, methodology of payment, internal approval and authorization of bonus payment and other incidental issues as may be decided by the employer. Alternatively, an employer can include a bonus clause in an employee’s contract of employment.
Determining a criteria for payment of bonuses. This can be pegged on performance, production, profit turnover over a specific period of time, the quality and quantity of work performed by employees or any other criteria an employer may wish to use in determining payment of such incentive.
Identify type of bonus to be paid and set out a clear procedure for paying them. Employers should identify a type of bonus, for instance, end of year bonus and the manner in which it will be disbursed to its employees, and either to pay it in cash or separately from the employee’s salary or wage, or to include it in the employee’s monthly salary.
Use non-cash bonus schemes as an alternative to cash bonuses. As pointed out above, there many types of non-cash bonus schemes or packages an employer can use to incentivize his or her employees without necessarily paying an outright cash bonus to the employees. For employers, it is important to note that not all employees are motivated by financial gain, cash bonuses or salary increments. Some employees would prefer to receive a bonus that will help them grow professionally and generally, career wise instead of a monetary one-time bonus.
By Kelvin Mosha – Associate Kilindu Giattas & Partners
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
