Bonus and performance-based pay in Denmark: What you need to know

What should your bonus agreement include? And will you still get a bonus if you become ill, pregnant or go on parental leave? Find answers to frequently asked questions about bonus and performance pay schemes in Denmark.

Bonuses are a good supplement to your fixed basic salary, and for many people, the prospect of a bonus is a motivating reward for reaching one’s targets at work.

However, bonus schemes can lead to a greater sense of financial uncertainty. For this reason, it’s a good idea to keep your bonus agreement specific and realistic – and always ask IDA’s legal advisers if you have doubts about entering into a bonus scheme at work.

What is a bonus scheme?

A bonus scheme is a form of renumeration in addition to your basic salary.

There is no general legislative framework for how much of your salary can be comprised of a bonus, but many workplaces have a policy for bonus schemes.

Your bonus is usually paid out when you achieve certain individual goals or when your department or company does so. For instance, you may receive your bonus after certain fixed time intervals, e.g. annually, every six months, every quarter of the year or every month.

You can also receive one-off bonuses, the most common of which are:

  • Sign-on bonus
  • Retention bonus
  • One-off bonus for a special achievement or effort

What is a sign-on bonus?

A sign-on bonus is a financial reward you get when you start a new job. The sign-on bonus is usually paid together with your first salary, shortly after you start the job.

The size of a sign-on bonus varies greatly from job to job and company to company. There is no rule of thumb for how much it should be. Sometimes it's a fixed amount of money, while other times it can be a percentage of your annual salary. It depends on the company's policy and the industry.

When you are offered a sign-on bonus, it is important to read the conditions carefully. Sometimes there is a requirement that you must stay in the job for a certain period of time in order to keep the bonus. Other times, there may be tax implications that you need to be aware of.

Have your employment contract reviewed by IDA's legal advisers

What is a retention bonus?

You may be offered a retention bonus as an incentive to stay in your position – for example, during an uncertain period for your business or before a business transfer. However, you risk not receiving your bonus if the company ends up going bankrupt or you resign from your position. That's because a retention bonus doesn't necessarily count as part of your salary.

Before agreeing on a retention bonus, it is therefore a good idea to contact IDA's legal department for advice.

Have your employment contract reviewed by IDA's legal advisers

What is a one-off bonus/one-time payment?

A one-off bonus and a one-time payment (engangsvederlag) are both forms of additional payments to employees in addition to their normal salary, paid out as a lump sum rather than repeatedly.

A one-off bonus is an additional payment you can receive as a reward for a good performance or in recognition of your contribution to the company. It is usually paid as a one-time payment that is not repeated annually.

A one-time payment is a single payment that is given as compensation for something specific, e.g. that you get extra responsibility, a particularly demanding task or as part of a severance agreement if you leave the company.

When and how they are paid depends on your employer's policies and individual agreements. Typically, the terms of a one-off bonus or payment must be set out in the employment contract or other written agreement between you and your employer.

Who can make a bonus agreement?

In principle, all employees – regardless of their job level – can enter into a bonus agreement with their employer. It only requires that the employer is willing to do so.

Bonus schemes are common in the industries where IDA members are employed and according to IDA's guide to employment terms, 38 percent of private sector employees have a bonus scheme.

However, it is up to the employer whether they want to offer a bonus scheme, and their use varies between companies.

To find out if you are eligible for a bonus, you should review your employment contract, collective agreement or the employee handbook in your company. If you cannot find the answer here, you can contact your union representative or the HR department.

It is important that the criteria for you to receive a bonus or a one-off payment are specific and written down so that there is no uncertainty about what you are entitled to.

Can I get a bonus scheme as a public employee?

As a public sector employee, you can get performance pay, which basically resembles a bonus scheme in a private company.

Performance pay is a variation of a one-time payment that you can get paid if you reach a number of set goals. You can either receive performance pay as a lump sum or as permanent supplements.

You can get performance pay both as a manager and as an employee, but it depends on the individual workplace whether you can be offered performance pay.

In most public sector workplaces, it is your union representative who negotiates salary and thus also performance pay. You should therefore contact your union representative to find out if performance pay is an option for you.

Read more about salary and salary negotiation for public employees

When can I make a bonus agreement?

It is most common that you agree on a bonus scheme in connection with the beginning of your employment.

You can also negotiate a bonus scheme later in your employment, but often it will be more difficult once you have signed your employment contract.

If you do not have the opportunity to get a salary increase for your salary interview, you can, for example, try negotiating a bonus scheme. It may be a more acceptable alternative for your employer because they only have to pay out the money once the result is achieved. Therefore, you must of course also assess that it is a good deal for you and that it is realistic that you can get the bonus.

What should I consider before entering into a bonus agreement?

Before you accept a bonus scheme, there are a number of questions you need to ask yourself.

Can you handle greater financial uncertainty?

The greater the proportion of your salary that is performance-determined, the more uncertainty you have in your finances.

Even if you feel confident that you can achieve the goals of your bonus scheme, it is IDA's recommendation that you should be able to cover your financial expenses with your basic salary alone.

Are you motivated by a bonus scheme?

It is different from person to person whether they experience a bonus scheme as a financial motivation or a stress factor.

Be honest with yourself and decide whether it gives you more or less job satisfaction that your salary varies according to your performance.

Can you earn more with a bonus scheme?

It is IDA's recommendation that you should be able to earn significantly more by having a bonus scheme than without. Otherwise, you will simply get greater financial uncertainty with no real benefits.

What should the bonus agreement include?

Make sure you get your bonus agreement in writing.

In the written agreement, you and your employer must carefully define the criteria for receiving the bonus. Otherwise, you risk a dispute about the payment of your bonus at a later date.

What are your targets?

It must be clear what conditions must be met for you to receive your bonus. Are these individual or collective goals for your department or the entire company?

How will it be determined whether you have reached your targets?

What data, numbers and information are used to determine if you have reached your targets?

For example, if your bonus is calculated on the basis of your employer's accounts, it must be defined what amount it is calculated by – e.g. whether it is before or after taxes.

How is your bonus calculated?

It should be clear what amount you can get paid and how it will be calculated.

What period is the agreement valid for?

It must be clear for which period the agreement applies and whether it will automatically be renewed.

When will you receive your bonus?

It should be clear when you will receive your bonus payment.

Contact IDA's legal advice before signing a bonus scheme

Bonus and holiday pay

When you go on holiday, you are entitled to receive your usual full salary, including any bonuses for the holiday period during which you would have worked if you had not had holiday. This applies regardless of whether the bonus is based on individual performance, company performance or other criteria.

When it comes to holiday allowance, you usually earn holiday allowance throughout the year as a percentage of your salary. This holiday allowance can be paid out when you are on holiday and usually also includes any bonus amounts you have earned. However, it may be necessary to ensure that your bonus is correctly registered and included in the calculation of your holiday allowance.

If you resign from your position and receive your bonus, please note that you are also entitled to holiday pay of the amount paid. This holiday allowance must be paid either into your Holiday Account (FerieKonto) or into your former employer's holiday card scheme at a rate of 12.5 percent of the amount paid. This applies even if the bonus or commission is paid long after you have left your position, e.g. if the bonus is only paid once a year.

Bonus in case of illness, pregnancy or parental leave

You also earn bonuses if you are on sick leave. This is because bonuses are considered part of your salary and that you as a salaried employee are entitled to receive your usual salary during illness.

When you are absent due to pregnancy and parental leave, you are entitled to half the bonus under the Salaried Employees Act during the period in which you as a mother are entitled to half pay 4 weeks before and 14 weeks after childbirth.

If you are entitled to full pay during parental leave, the bonus will also be included as part of the salary. However, it may be stated in the staff manual, collective agreement or the like that bonuses are not part of the salary during parental leave. In that case, you are welcome to contact IDA for further advice.

Contact IDA about parental leave and bonus

Am I entitled to my bonus if I resign or am terminated?

Regardless of whether you resign or are terminated, you are entitled to a proportionate share of your bonus corresponding to the time you have been employed in the earning year.