The diversified development and universal application of pay-for-performance (P4P) has stimulated the building and the improvement the P4P system. The instruments at the root of the P4P system are varied, including not only contractual documents between the employer and employee (e.g. offer letter, labor contract, and performance bonus agreement) but also employee handbooks and other rules and regulations.
Different instruments play different roles in recruitment, operation, retaining and eliminating personnel, etc. to facilitate an enterprises' objectives by each kind's unique superiority. However, given the divergent timing, subjective and purposes when designing the instruments, it is highly possible that provisions in alternate instruments are inconsistent or may even conflict with each other. Therefore, the multi-instrument P4P system is like a double-edged sword: its harmonious functioning will enable enterprises to reward performance fairly and flexibly, balancing reward and punishment with the goal of stimulating healthy degrees of productivity. To the contrary, if designed inappropriately, with contradictory provisions, the sharp sword may convert to a hard rock. The practice has seen many examples that enterprises lift the rock only to drop it on its own feet. Thus, I will advise on how to manage the multi-instrument P4P system to avoid the potential legal risks, based on some common conflicting scenarios whereby different instruements are practically applied. The P4P discussed here refers to performance-related remuneration rewarded in the form of currency, in a relatively assured cycle, instead of shares, options and other types of rewards.
Case I: Performance Bonus Agreement vs Labor Contract
Mr. Zhang signed a labor contract with Company L on 30th March 2011, which laid down his base salary at RMB2,500 and performance pay subject to performance appraisal governed by the internal distribution policy, based on his work performance, achievements, and material contributions. Mr. Zhang applied for labor arbitration after the two parties' labor relationship terminated on 1st October 2012, requesting the company to make up the unpaid salaries of more than RMB 87,000 over the period of March 2011 to October 2012, by virtue of a Performance Bonus Agreement (hereinafter "the Agreement") signed between the two parties.
The case lasted until the re-trial stage. During the retrial procedure, to find out the reason behind the inconsistent agreements on Mr. Zhang's remuneration in the Agreement and the Labor Contract, the judge held that i) the authenticity of the Agreement was doubtful, displaying a base salary of RMB 5,800 and an annual performance payment of RMB 37,800. This was very different from the labor contract, let alone the signing date was lack of rationality; ii) Mr. Zhang had never raised any objection to his paid salaries which are consistent with the labor contract; iii) even if the Agreement was genuine, the two parties had never fulfilled this contract, and thus it should not be regarded a reference to settle the dispute revolving around remuneration. Based on the above argument, the court rejected Mr. Zhang's retrial application.
In general, if an employee signed a separate agreement on performance bonus with the employer after signing the labor contract, such agreement should be deemed as amending the corresponding content of the labor contract, which serve as having the equivalent effect to the labor contract. In practice, when separate agreements conflict with the labor contract like in the above case, where one party denies the authenticity or effectiveness of the agreement and when it is difficult to find out the facts behind it, the judges tend to pay more attention to whether the agreement was actually performed.
Case II: Offer Letter vs Labor Contract
Mr. Guo filed a case against his ex-employer Group Company T. Based on the offer letter sent by Company T before the term of employment had started. He claimed the unpaid part of his annual performance bonus from 2011, RMB69,000 and the annual performance bonus from 2012, RMB98,000.
One of the contentions, in this case, was that the content referring to performance pay in the offer letter did not show full correspondence to that in the labor contract. The offer letter was sent by Email before Mr. Guo's joining, which stated "the position of Deputy Manager of the Human Resources Department, pre-tax annual remuneration of RMB263,500, among which the monthly salary is RMB10,000; whereas, in the labor contract, it only displayed that the monthly remuneration structure was "monthly base salary + monthly performance pay" and the monthly performance pay should be determined by the result of performance appraisal, without specifying the amount. The company denied the authenticity of the offer letter.
Nevertheless, the retrial court eventually admitted this evidence taken into account: i) the offeror, the offeree and the onboard date as displayed on the offer letter corresponded to the contractual parties and the signing date of the labor contract; ii) Mr. Guo tendered the salary sheet, sheets of other types of remuneration, the transaction summary of the bank account for wage payment and the sheet of distribution details of the 2011 annual performance bonus, which through calculation matched, while the company failed to tender contrary evidence in this respect.
Furthermore, Mr. Guo effectively proved the specific number of total amount of the annual performance bonus budget in 2011, whereas the company failed to disprove it. Last but not the least, the company failed to prove that Mr. Guo was not qualified to be entitled to the annual performance bonus of 2011 and 2012. On the above grounds, the court supported Mr. Guo's claim.
The offer letter, also known as a letter of admission, despite being presented earlier than the labor contract, should be deemed as an integral part of labor contract when it refers to remuneration. It means that, according to Article 35 of the Labor Contract Law, amending the performance bonus laid down on the offer letter should also be negotiated between the employer and the employee, and then put into written form. To conclude the above case, it is not hard to find that, when no coherence exists in the content of the offer letter and that of labor contract concerning performance pay, the judgment tends to rely on allocating the burden of proof, i.e. whether the company may tender sufficient evidence to support its propositional distribution standards and rebut the counterparty's, and, to quantify the employee's failure in meeting certain distribution conditions of the performance pay. Under this circumstance, the legal risks increase for employers to take adverse effect lacking evidence, given that employers carry a heavier burden of proof.
Case III: Contractual Instruments vs Rules and Regulations
Ms. Qin took the responsibilities of HR Manager in a property management company N since 1 March 2010. Before the term of employment started, she received an offer letter demonstrating her monthly salary as RMB 8,000, among which, the base salary was RMB 4,800, and the company may grant performance bonus based on the result of a performance appraisal. The base for annual performance bonus amounted to 2-months individual salaries; the cycle calculating annual performance bonus was from 1 January to 31 December of the performance year, while the calculated bonus would only be issued in February of the next year. Her first labor contract lasted 3 years and expired on 1 March 2013, which said the remuneration shall refer to the offer letter. The second labor contract expired on 2 March 2016, which laid down her monthly salary as RMB 6,600. The company notified Qin not to extend her second labor contract upon its expiration. Qin then applied for labor arbitration, requesting the company to pay compensation for the illegal termination of her labor contract and the annual performance bonus of 2014, RMB 24,000.
With regard to the 2014 annual performance pay, the company argued: i) the content of the offer letter was only valid within the period of the first labor contract, aiming at remuneration in that contract term, of which the performance bonus should be calculated in proportion according to the result of performance appraisal; since the first labor contract had expired, the offer letter lost its validity; ii) Article 2.2.3 of the Employee Handbook prescribed that the company may deprive an employee's annual performance bonus provided that the employee had taken up to 1 month sick leave accumulatively within a performance year; since Ms. Qin had taken 1 month sick leave accumulatively in 2014, she should not be granted the annual performance bonus of that year.
Ms. Qin argued that the offer letter never lost its validity by proving that the content on the offer letter and the Salary Adjustment Notification matched, and, she had received the annual performance bonus from 2011 to 2016 except in 2015, as displayed in the transaction summary of her bank account for wage payment.
The court of second instance considered that the content of the Employee Handbook cannot serve as a legal justification to reject the payment of the 2014 annual performance bonus, given that its modification in the March of 2011 did not go through the statutory democratic procedures. On this ground, taking into account the actual payments of the annual performance bonus in the other years, the court eventually upheld Ms. Qin's claim.
In the P4P instrument system, companies tend to set conditions, especially restrictive conditions on distributing performance pay through an employee handbook or other separate rules and regulations. Compared with contractual instruments, they are more systematic and of a general binding force. The given case manifests that defects in rules and regulations would become an Achille's heel, preventing its implementation. Both its establishment and amendments should go through statutory democratic procedures. It is worth mentioning that, if the prescriptions about performance pay in employee handbook or other separate policies conflict with the relevant agreements in the labor contract, based on Article 16 of the Supreme Court on Interpretation (II) on the Application of the Laws on the Labor Dispute Cases (FS  No.6), the latter shall prevail.
The above three cases reveal some general problems on the cohesion and coherence of the multi-instrument Payment-for-performance System. On the one hand, they stem from the unstable and uncertain nature of performance pay - it directly relates to the performance of a company and its employees and appraisal criteria can vary greatly, which lead to a different method of setting performance pay compared with base salary, allowance, and other fixed remuneration. On the other hand, performance pay acts as an incentive - in order to incentivize production and retain talents, companies have to break through the limitations imposed by uncertainties and make material promises. In this case, how can companies establish an effective P4P, flexibly making use of all kinds of instruments with low risks?
In relation to contractual instruments, primarily, be careful with phrasing. Avoid absolutizing expressions on, for example, whether to pay or not and the amount to pay, so to differentiate performance-related salary from base salary. Secondly, separate contractual documents such as offer letter and performance bonus agreement, despite more flexible than labor contract in term of utilization, tend to enumerate the amount. Thus, it is important to set clear terms of validity on these instruments, and the term better not to be set too long, so to avoid the dilemma faced by the company in Case III - without demonstrating the term of validity in the offer letter, the actual payments of previous years were referred in the judgement to determine the company's obligation to pay in the concerned year. Last but not the least, laid down either by labor contract or separate contractual instruments like offer letter, amending performance pay-related content on such documents should all by negotiation and be transformed into written form, so to avoid disputes in the future.
In terms of rules and regulations, especially employee handbook or other separate policies which restrain the distributing conditions of performance pay, both formulation and amendments should follow the statutory democratic procedures in order to become effective, i.e. through democratic discussion, seeking advice from employee representatives or the trade union and making the final version public.