STI Bonuses in Australia: Legal Considerations for Employers

An STI bonus can be a useful way to reward performance, but it also creates legal risk if the rules are vague, inconsistent, or only partly written down. Employers often get caught by three common mistakes: calling a bonus “discretionary” without defining what that means, setting targets that are impossible to measure or change mid-year, and forgetting that bonus wording can interact with employment contracts, workplace policies, and even unfair dismissal or adverse action claims.

If you are offering short term incentives to employees in Australia, the detail matters before you sign a contract or announce a scheme internally. A bonus plan that looks simple in a board meeting can become difficult once an employee resigns, goes on leave, is terminated, or disputes whether they met their targets. The main issue is not just whether you want to pay a bonus, but whether your documents give you the legal right to decide how and when it is paid.

This guide explains what an STI bonus usually means, the legal issues to check before you sign, the mistakes employers commonly make, and how to draft clearer bonus terms for your team.

Overview

An STI bonus usually refers to a short term incentive tied to performance over a shorter period, often quarterly or annually. For Australian businesses, the legal position depends heavily on the wording in the employment contract, bonus plan rules, workplace policies, and the way the scheme is applied in practice.

A well-drafted STI arrangement should make it clear whether the bonus is guaranteed, conditional, or discretionary, and what happens if circumstances change during the performance period.

• define whether the STI bonus is contractual or discretionary
• set measurable targets and explain who assesses them
• state when the employee must still be employed to qualify for payment
• deal with resignation, termination, misconduct, leave, and partial-year service
• avoid terms that conflict with awards, enterprise agreements, or the National Employment Standards
• make sure managers apply the scheme consistently and keep records

What STI Bonus Means For Australian Businesses

An STI bonus is generally a short term incentive paid to employees for meeting business, team, or individual performance goals over a defined period. In practice, employers use STI arrangements to reward sales performance, profitability, delivery milestones, leadership outcomes, safety measures, or other key metrics.

There is no single Australian law that creates a standard STI bonus model. Instead, the legal effect comes from the documents you use and the promises you make. That means two businesses can both offer an “STI bonus” but have very different legal obligations.

What does STI stand for?

STI usually stands for short term incentive. It is different from long term incentives, which may involve equity, options, or performance rights over a longer period.

For most SMEs, an STI bonus is a cash bonus assessed at the end of a quarter, half-year, or financial year.

Is an STI bonus part of salary?

Usually, no. An STI bonus is commonly separate from base salary. But that does not mean it sits outside the employment relationship or can be managed casually.

If your contract says the employee is entitled to participate in a bonus scheme, or if the rules are framed as binding promises, the employee may argue they have a contractual right to the payment if the conditions are met. This is where founders often get caught. A bonus labelled “discretionary” can still lead to disputes if the surrounding wording suggests the employer must exercise that discretion honestly, reasonably, and according to clear criteria.

Where bonus terms usually appear

STI terms may appear in more than one place, and those documents need to line up.

• the employment contract
• a separate incentive plan or commission plan
• a workplace policy
• offer letters or side letters
• emails or presentations given to staff
• board or management approvals

If these documents say different things, the employee may rely on the wording that is most favourable to them. Before you rely on a verbal promise or a slide deck sent by a manager, make sure your formal documents actually support the position you want to take.

Why employers offer STI bonuses

For many businesses, a short term incentive can help align employee effort with business goals. It can also help with recruitment and retention, especially for senior hires, sales roles, and managers responsible for clear commercial outcomes.

But the legal value comes from clarity. A bonus scheme should motivate staff without creating a dispute every time someone leaves, takes parental leave, or disagrees with their performance rating.

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 a contract or issue a bonus plan, make sure the wording answers the real questions that arise when the employment relationship changes.

1. Is the bonus guaranteed, conditional, or discretionary?

This is the first issue to pin down. If the bonus is guaranteed once stated targets are met, your business may have very limited flexibility later. If it is conditional or discretionary, the documents should say so clearly and explain how the discretion works.

“Discretionary” should not be used as a catch-all label. If the plan sets exact targets, exact percentages, and exact payment dates, an employee may still argue the bonus became effectively payable once they hit the numbers.

To reduce ambiguity, your documents should address points such as:

• whether participation in the STI scheme is at the employer’s discretion
• whether the employer may amend, suspend, or withdraw the scheme
• whether performance against targets automatically creates an entitlement
• whether the employer retains a final decision on assessment and payment

2. What are the performance conditions?

Targets should be specific enough to assess fairly. Vague phrases like “strong contribution” or “good cultural fit” are more likely to trigger disagreement unless they are paired with a clear review process.

Before you sign, check whether the bonus conditions cover:

• individual KPIs
• team or company performance measures
• financial thresholds, such as revenue or EBITDA targets
• non-financial measures, such as compliance, safety, or customer outcomes
• who sets the targets and when
• whether the targets can be adjusted during the performance period

If business performance affects the bonus pool, say so expressly. If management can revise targets because of a restructure, acquisition, or market change, include that mechanism in writing.

3. When does the employee become eligible for payment?

Many disputes come down to timing. An employee may meet targets during the year but resign before the payment date. Another may be dismissed near the end of the period and claim they still earned the bonus.

Your documents should state:

• the performance period
• the assessment date
• the payment date
• whether the employee must be actively employed on the payment date
• whether notice of resignation or termination affects eligibility
• whether a bonus can be pro-rated for part-year service

This is especially important before you hire your first senior worker on incentive-heavy terms. A short clause that simply says “eligible for an STI bonus up to 20%” usually leaves too much unsaid.

4. What happens on resignation, termination, or misconduct?

Leaver provisions are one of the biggest pressure points. If you do not address them clearly, you are more likely to face a payment dispute at the exact time the employment relationship is ending badly.

Consider what the plan should say about:

• resignation before the end of the performance period
• termination with notice
• termination without notice for serious misconduct
• redundancy
• garden leave
• whether an unvested or unpaid STI bonus is forfeited in certain cases

These clauses should be drafted carefully. An employer cannot contract out of minimum legal rights, and any termination decision still needs to comply with general employment law obligations.

5. How does leave affect the STI bonus?

Leave can complicate bonus calculations, especially with parental leave, personal leave, annual leave, and long service leave. The legal answer depends on the scheme wording, the type of leave, and whether the bonus is tied to actual performance, attendance, or broader company outcomes.

If you want to pro-rate for unpaid leave, say so expressly. If the bonus is based partly on company performance rather than active work performed by the individual, a blanket exclusion may be harder to justify in practice.

Be careful here. Decisions affecting bonuses during or after protected leave can raise discrimination or adverse action issues if handled poorly.

6. Does the STI arrangement interact with awards, enterprise agreements, or the NES?

An STI bonus does not replace minimum employment entitlements. National Employment Standards, modern awards, and enterprise agreements may still apply to the employee depending on their role and circumstances.

A bonus clause should not be used to blur minimum pay obligations, set-off arrangements, or statutory leave rights. Before you sign, make sure the incentive structure sits on top of lawful minimum terms rather than trying to absorb them.

7. Are there clear decision-making and record-keeping processes?

You will be in a much stronger position if the business can show how it assessed the bonus and who approved it. Problems often arise when a manager gives verbal assurances during the year, but the final decision-makers apply different criteria later.

Internal processes should cover:

• how performance is measured
• what records support the assessment
• who has authority to approve payments
• how disagreements are escalated
• how plan changes are communicated to staff

If your business is scaling quickly, consistency matters. Once different managers start applying different bonus rules to similar employees, the legal and employee relations risk increases fast.

Common Mistakes With STI Bonus

The most common STI bonus problems come from poor drafting and inconsistent behaviour, not from the bonus idea itself. Employers usually run into trouble when the written terms do not match what managers say or what employees reasonably expect.

Calling it discretionary, but treating it like guaranteed pay

If your contract says the bonus is discretionary but the business has paid it automatically every year based on fixed targets, employees may expect the same result again. Past practice is not always decisive, but it can affect how a dispute is viewed.

If you want real discretion, the scheme needs genuine decision-making language and genuine decision-making in practice.

Leaving key terms out of the contract

A short reference to an STI bonus in an offer letter often causes more problems than it solves. If the contract mentions a bonus but does not attach or clearly incorporate the governing plan rules, the employee may argue the promise is broader than you intended.

Before you sign, make sure the contract either contains the bonus terms or clearly states where the detailed written terms sit and how they apply.

Changing targets mid-cycle without a clear contractual right

Businesses sometimes need to revise targets because forecasts change, a major client leaves, or the role shifts after a restructure. The risk is highest when the employer changes the goalposts after the employee has already been working toward the original targets.

If the plan allows changes, the wording should say who can make them, when they can be made, and how they will be communicated. Even then, changes should be handled carefully and consistently.

Ignoring employee departures until the end

Many businesses only think about the STI bonus when someone resigns or is terminated. By then, the contract may be too vague to support the employer’s preferred outcome.

This is why founders should check bonus wording before they hire, before they promote, and before they sign a senior executive employment contract.

Relying on verbal promises from managers

A manager might say, “Don’t worry, you’ll get the bonus if you hit your numbers.” That kind of statement can create trouble if the formal documents leave room for a different outcome.

Train managers not to make off-the-cuff promises about bonus payments unless those promises match the written scheme.

Using one template for every role

A sales commission arrangement, a founder-level executive STI plan, and a team manager bonus should not always use the same wording. Different roles raise different issues around targets, discretion, authority, and what counts as performance.

One-size-fits-all documents often miss the commercial reality of the role and create avoidable ambiguity.

Forgetting the wider employment law context

A bonus dispute rarely stays limited to bonus wording. It can overlap with termination decisions, performance management, discrimination concerns, and general protections issues.

For example, if an employee raises concerns about workplace rights and then loses a bonus opportunity, the business may face arguments that go beyond contract interpretation. The STI scheme needs to fit within a lawful and consistent employment framework.

FAQs

Is an STI bonus legally required in Australia?

No. An employer does not have to offer an STI bonus unless it has agreed to do so in a contract, policy, enterprise agreement, or other binding arrangement.

Can an employer refuse to pay a discretionary STI bonus?

Sometimes, yes, but it depends on the wording and how the scheme has been applied. Calling a bonus discretionary does not always end the issue if the employee can point to clear targets, clear promises, or inconsistent treatment.

Should the employee still get the STI bonus if they resign before payment?

Only if the contract or plan says they remain eligible, or the wording leaves room for that argument. Many schemes require the employee to be employed on the payment date, but that rule should be stated clearly.

Can an STI bonus be pro-rated for part of the year?

Yes, if the documents allow for pro-rating. The formula and circumstances should be set out clearly, especially for new starters, employees on unpaid leave, or staff leaving mid-cycle.

Should bonus terms be in the contract or a separate policy?

Either can work, but the documents need to align. Many employers use the employment contract to confirm eligibility and refer to a separate plan with detailed rules, amendment rights, and assessment criteria.

Key Takeaways

• An STI bonus is a short term incentive, but its legal effect depends on the wording in your contract, plan rules, and related documents.
• The key issues are whether the bonus is guaranteed or discretionary, how performance is measured, and what happens on resignation, termination, leave, or part-year service.
• Vague targets, inconsistent manager statements, and missing leaver provisions are some of the most common sources of disputes.
• Australian employers should make sure bonus arrangements do not conflict with minimum employment entitlements, awards, enterprise agreements, or broader workplace laws.
• Clear drafting, aligned documents, and consistent internal processes will put your business in a much stronger position before you sign.

If you want help with employment contracts, contract drafting, or leaver provisions, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.