STI Bonus Schemes: Legal Issues in Australia

An STI bonus can be a useful way to reward performance, but it also creates legal risk if the terms are vague, inconsistent or left to verbal promises. Employers often get caught by three common mistakes: calling a bonus “discretionary” while treating it like an entitlement, failing to document clear performance conditions, and forgetting that bonus terms can affect notice payments, leave calculations and termination disputes. Those issues usually surface at the worst time, such as when a senior employee resigns, a sale target is missed by a narrow margin, or a worker is dismissed before the payment date.

If you are putting an STI bonus into an employment contract, bonus plan or side letter, the drafting matters. Small wording choices can change whether the bonus is likely to be enforceable, whether you can amend the scheme later, and whether an employee may claim they were denied a payment unfairly. This guide explains what an STI bonus is, the main legal issues Australian employers should check before they sign, the mistakes that regularly cause disputes, and the practical points to get right in your documents and processes.

Overview

An STI bonus is a short term incentive, usually linked to annual or quarterly performance. For Australian businesses, the main legal question is not whether you can offer one, but whether the bonus terms are clear enough to support the outcome you expect when performance, resignation, dismissal or business conditions change.

A well-drafted STI arrangement should line up with the employment contract, any bonus policy, and the way managers actually communicate and assess performance.

State whether the STI bonus is discretionary, formula-based, guaranteed, or a mix of these.
Define the performance measures, assessment period, approval process and payment timing.
Explain what happens if the employee resigns, is terminated, is on leave, or starts part way through the bonus period.
Check whether the bonus wording can be changed later and how changes will be communicated.
Make sure managers do not make side promises that conflict with the written terms.
Review whether bonus amounts may need to be considered in other employment entitlements or disputes.

What STI Bonus Means For Australian Businesses

An STI bonus is usually a short term incentive tied to business, team or individual performance over a defined period. In practice, it often sits beside fixed salary as part of total remuneration, especially for executives, sales staff, managers and growth-focused hires.

Most Australian employers use STI bonus arrangements to drive results and retain key staff. That can work well, but only if the scheme reflects how your business really makes decisions. Trouble starts when the contract says one thing, the policy says another, and the manager recruiting the employee describes a third version in email or interviews.

What does “STI” usually cover?

Short term incentive arrangements vary a lot, but they often include one or more of the following:

sales or revenue targets
EBITDA or profit targets
project delivery milestones
customer retention or growth measures
individual key performance indicators
team or business-wide strategic goals

Some schemes are heavily formula-based. Others are partly objective and partly discretionary, where a board, founder or manager can adjust the payment based on broader business performance or conduct issues.

Where businesses usually document an STI bonus

An STI bonus may appear in several documents, and that creates a drafting risk before you sign. Common places include:

the employment contract
a separate bonus plan
a remuneration schedule
a side letter for a senior hire
an executive incentive policy
email correspondence during recruitment or review discussions

If these documents do not line up, an employee may argue that the most favourable wording applies or that the bonus became part of their contractual entitlement. This is where founders often get caught. A business may think the policy controls the outcome, but the contract wording is broader, or the recruitment emails promise payment on terms that were never properly documented.

Discretionary bonus versus contractual entitlement

The label “discretionary” does not always decide the issue. Courts and tribunals generally look at the real wording and the surrounding conduct. If your documents say the employer has absolute discretion, but the employee has always received the STI bonus when fixed metrics were met, and managers have described payment as effectively guaranteed, the business may have a harder time arguing there was no entitlement.

That does not mean every discretionary scheme is invalid. It means the discretion has to be drafted carefully and exercised consistently. If you want genuine discretion, the documents and internal messaging need to support that.

Why this matters for startups and SMEs

Smaller businesses often move quickly and negotiate remuneration case by case. That makes STI bonus terms more likely to be customised, informally discussed and changed over time. Before you hire your first senior worker on a bonus package, or before you offer a retention incentive during a growth phase, the main risk is assuming a short clause copied from an old employment contract will cover every issue.

For startups and SMEs, an STI bonus dispute can become expensive quickly because it often appears alongside other claims, such as underpayment allegations, notice disputes, adverse action arguments or conflicts about termination. Clear drafting reduces that risk and gives the business a better position if the relationship breaks down.

Legal Issues To Check Before You Sign

The safest approach is to treat an STI bonus as a contract issue first and an HR issue second. Before you sign, you need to know exactly what triggers payment, who decides the outcome, and what happens if the employment relationship changes mid-cycle.

1. Are the bonus terms actually clear?

A vague clause is one of the biggest problems. If the contract simply says the employee is “eligible to participate in an STI bonus scheme” without explaining what that means, there is room for argument later.

Your documents should deal with the core mechanics of the scheme, including:

the bonus period, such as quarterly or annual
the target amount, such as a percentage of base salary
the performance criteria
who assesses performance
whether the board or a manager must approve payment
when payment is made
whether the employee must still be employed on the payment date

If the business expects to adjust targets during the year, say so. If exceptional circumstances let the company reduce or withhold payment, that should also be stated clearly.

2. Is it discretionary, objective, or both?

You should choose the model deliberately. A fully objective formula can be easier to administer, but it also creates stronger entitlement arguments if the employee hits the numbers. A fully discretionary scheme gives flexibility, but employees may resist it during hiring, especially for senior roles.

Many businesses use a mixed model. For example, the STI bonus might be based on target achievement, but subject to board approval and wider business conditions. If you use that structure, explain the scope of the discretion in plain English. Avoid wording that sounds absolute in one clause and limited in another.

3. What happens if the employee leaves?

This is one of the most disputed parts of any STI bonus arrangement. Before you sign, decide your position on resignation, dismissal, redundancy and notice periods.

Your documents should address scenarios such as:

the employee resigns before the end of the performance year
the employee is terminated for misconduct
the employee is terminated without cause before payment is made
the employee works out notice or is paid in lieu
the employee leaves after the performance period ends but before formal approval or payment

Businesses often want a rule that the employee must be actively employed and not under notice on the payment date. That may help, but the wording needs to be consistent across the contract and policy. If the employer behaves inconsistently, such as paying some departing employees but not others without a documented reason, the risk of challenge increases.

4. Can the business amend or withdraw the scheme?

If you want flexibility to change targets, suspend the STI bonus scheme or replace it with another incentive structure, that needs to be documented. A policy may say the company can amend the scheme at any time, but if the employment contract promises a bonus on more fixed terms, the policy may not override the contract.

Before you accept the provider's standard terms, or before you rely on a legacy contract template, check the order of documents carefully. If there is a separate bonus plan, the contract should make clear whether participation is governed by that plan as amended from time to time, and whether the plan creates contractual rights.

5. Could the bonus affect other employment entitlements?

In some situations, bonus payments may become relevant to disputes about notice, underpayments, misleading recruitment statements, unfair dismissal remedies or general protections claims. The exact treatment depends on the wording, the facts and the type of claim.

There is no single rule that applies in every case. Still, employers should assume that a poorly drafted STI bonus can create arguments beyond the payment itself. If a bonus is described as guaranteed remuneration, or if it has been paid regularly and predictably, an employee may argue it should be considered when assessing amounts owed on termination or loss.

Tax and superannuation consequences can also arise, but those should be reviewed with an accountant or tax adviser.

6. Are managers saying things the documents do not support?

Verbal assurances and recruitment emails cause a lot of avoidable disputes. A founder might tell a candidate, “You’ll definitely get the 20 per cent STI if the company lands this project,” even though the contract later says the bonus is discretionary and subject to board approval.

Before you sign, make sure the people negotiating the hire understand the written position. The safest internal process usually includes:

one approved bonus clause or plan template
clear authority on who can offer changes
written confirmation that no manager can promise bonus outcomes outside the approved documents
consistent performance review records

7. Is the scheme consistent with good faith and fair process concerns?

Australian employers should be careful about arbitrary decision-making. Even where a scheme is discretionary, an unreasonable or inconsistent assessment process can still create risk. That is especially true if performance criteria were never communicated clearly, or if the employee was assessed against goals that changed informally during the year.

A practical way to reduce that risk is to set goals in writing, keep evidence of performance discussions, and record the reason for any downward adjustment or refusal to pay.

Common Mistakes With STI Bonus

The biggest STI bonus mistakes are usually drafting and process failures, not exotic legal problems. Most disputes come from ordinary founder habits: moving fast, relying on old templates, and assuming everyone has the same understanding of a bonus offer.

Calling it discretionary, but operating it like a guarantee

If every employee who hits target receives the same payment each year, and managers describe the STI bonus as a standard part of pay, the business may struggle to rely on a discretion clause later. The written terms and actual practice need to match.

Using unclear performance metrics

“Meet agreed KPIs” is not enough if no one ever documents the KPIs. A clause that depends on future agreement can create uncertainty if the parties never finalise the targets.

Better practice is to identify the targets in the contract, attach a schedule, or use a policy that sets out how and when targets are issued and approved.

Ignoring bad leaver and good leaver scenarios

Founders often focus on the upside case and forget to plan for exits. Then a valued employee resigns after delivering a strong year and expects a pro rata bonus, while the business assumes no payment is due because the employee left before the payment date.

If your position is no payment on resignation, say so. If you want discretion to pay a pro rata amount in special cases, document that too.

Changing the scheme informally mid-year

Businesses sometimes cut or change targets once trading conditions worsen. That may be commercially understandable, but informal changes can create legal and employee relations issues if the original scheme looked contractual.

Before you make changes, check the amendment power in the contract or bonus plan, communicate the change clearly, and keep a written record of acceptance where needed.

Relying on policy wording without checking the contract

An employer may think the bonus policy gives full flexibility, but the employee's signed contract may already promise participation on more fixed terms. When there is a conflict, the contract usually matters a lot.

This is a common problem for SMEs that have updated their HR policies over time without refreshing older employment agreements.

Forgetting about employees on leave or partial-year service

STI bonus disputes also arise where an employee starts mid-year, takes parental leave, works part-time for part of the period or is absent for other reasons. If your business wants pro rata treatment, eligibility thresholds or special rules for unpaid leave, include them expressly.

Be careful that the scheme is applied lawfully and consistently. A blanket decision that disadvantages an employee because they exercised a workplace right can create a separate legal issue.

Poor records at review time

A bonus decision is much easier to defend when the business can show how it assessed performance. If there are no signed targets, no review notes and no approval record, the decision can look arbitrary even when there were legitimate reasons.

At a minimum, keep records of:

the bonus terms provided to the employee
the targets and any later updates
performance discussions during the period
the decision-maker and approval steps
the final calculation and reasons for any adjustment

Assuming one clause works for every role

A simple sales incentive, a founder-level executive STI arrangement and a company-wide annual bonus should not all use identical wording. The more senior or customised the package, the more likely it is that the business needs tailored contract drafting.

This matters most before you sign with executives, key revenue hires and employees whose variable pay forms a meaningful part of their remuneration.

FAQs

Is an STI bonus legally required in Australia?

No. An STI bonus is usually optional unless your contract, workplace policy, enterprise agreement or other binding arrangement creates an entitlement.

Can an employer refuse to pay a discretionary STI bonus?

Sometimes, yes, but the answer depends on the wording and the employer's conduct. If the bonus is truly discretionary and the discretion is exercised consistently and lawfully, the employer may be able to refuse payment. If the terms or past practice suggest the payment was earned, the risk of dispute is higher.

Should the employee have to be employed on the payment date?

Many employers include that requirement, but it needs to be clearly written and applied consistently. It should also fit with the rest of the contract and policy documents.

Can we change an STI bonus scheme after the employee starts?

Possibly, but only if the documents allow it or the employee agrees where needed. If the STI bonus forms part of contractual remuneration, unilateral changes may create risk.

Do we need a separate bonus policy if the contract already mentions STI?

Not always, but a separate policy can help if it is drafted properly and clearly integrated with the contract. The key point is that the documents must not conflict.

Key Takeaways

An STI bonus can be a useful incentive, but poor drafting often turns it into a dispute about entitlement, timing or termination.
The most important issues are whether the scheme is discretionary or formula-based, how performance is measured, and what happens if employment ends before payment.
Your employment contract, bonus plan, side letters and manager communications should all say the same thing.
Clear rules on amendment, approval, active employment, pro rata treatment and leave scenarios help reduce disputes.
Consistent records and a fair assessment process matter, especially where the employer wants to rely on discretion.
Before you sign, it is worth reviewing tailored wording for senior hires, revenue roles and any employee whose remuneration depends heavily on variable pay.

If you want help with bonus clause drafting, employment contract reviews, termination risk issues, and bonus policy terms, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

STI Bonus Schemes in Australia: Legal Issues for Employers