KPI: Recording of personal achievements19 March, 2018
By Irina Grigorieva, Payroll Department Manager
Key Performance Indicators (KPIs) have been used in Russia for over 20 years and have become a frequent practice in many companies. “Paschet” asked Irina Grigorieva, Payroll Department Manager at Intercomp, to make sense of the main points related to KPI, in particular, what accounting departments should pay attention to if a KPI system is introduced in their organization.
The purpose of KPI systems is to ensure that the employees from different departments of the same organization act coherently and bind the actions performed by specialists to the overall strategic goals of the organization. In other words, introducing key performance indicators helps “measuring the results” of a particular employee and of the company as a whole.
Strategic goals are developed by top management and accountants if they are engaged in the KPI system introduction process. To this end, the accounting specialist involved must be as familiar as possible with the company’s strategy.
Introducing a KPI system is a complex process consisting of several stages. We will describe in more detail the stage of transition to record keeping as this is an important moment for accounting departments. KPIs must be in the accounting system duly documented, and their assessment should be objective and accurate.
How to document the introduction of a new bonus system based on KPIs? Employers may include bonus provisions in their approved internal regulations, collective agreements, internal work rules, etc.
If the KPI assessment system applies to an entire subdivision, then setting bonus provisions in this form is quite convenient. If the incentive system is recipient-oriented (for a particular position), then the optimal way is to include bonus provisions in employment contracts or a separate order.
Article 74 of the Russian Labor Code sets out that new bonus systems start being introduced with a notice of change of bonus conditions addressed to the intended employees two months prior to such change. Then managers explain the new bonus procedure.
If an employee is not satisfied with such conditions, his/her employer must offer him/her another position, if available, or terminate his/her employment contract under Article 77(7) of the Russian Labor Code.
It is worth noting that KPIs may be applied only to employees working under an employment contract. If KPIs are applied to individuals working under a civil law contract, this could result in having such contracts recognized as employment contracts (North Caucasus District Commercial Court Ruling No. F08-2895/2015 dated May 29, 2015 Case No. А32-17466/2014).
Most disputes arise when an employee has already been fired when bonuses are paid out. For example, Khabarovsk Regional Court (Ruling dated May 25, 2017 Case No. 33-3992/2017) declined KPI bonus payment to an employee to whom such bonus was not due based on internal regulations and the employee’s employment contract: “The court reasonably proceeded on the basis that incentive bonus payment and the determination of its amount is the employer’s sole prerogative for each employee, such bonus is not guaranteed to be systematically paid and is not among mandatory payments. Its payment is a right, not an obligation of the employer who saw no grounds for payment of the bonus requested by the plaintiff.”
Moscow City Court rendered a similar decision on July 10, 2017 in ruling No. 33-26207/2017, pointing out that “bonuses are not mandatory, guaranteed and unconditional payments, they are incentive payments, and any bonus payment to an employee is an employer’s right rather than obligation <...> the plaintiff’s claims for bonus payment is therefore dismissed.”
Primorsk Regional Court in case No. 33-1318/2016 dated February 16, 2016, nevertheless, ordered a company to pay the bonus owed to a dismissed employee, referring to the fact that he had worked the entire assessed period and fulfilled all the criteria for bonus payment, while the regulations did not provide for non-payment to dismissed employees.
Moscow City Court upholds a similar opinion in appeal decision of August 02, 2013 in case No. 11-22649, but considers non-payment as discrimination, i. е. a violation of Article 37(3) of the Russian Constitution and Article 3 of the Russian Labor Code: “including in internal regulations on salary a clause specifying that an employee who has worked the entire period assigned for bonus is not entitled to his/her bonus solely due to his/her resignation is evidence of discrimination.” How to measure performance indicators? For example, an employee filed a court claim for collection of bonus payable based on fulfillment of KPIs which were then downgraded in the manager’s assessment. After examination of the case materials, the court, however, dismissed the claim (Moscow City Appellate Court Ruling dated March 20, 2017 Case No. 33-10191/2017), determining that “employee’s performance is determined by a direct manager’s expert assessment and is approved by a manager to whom the direct manager reports” and that “a bonus is not a guaranteed component of employees’ total remuneration, no specific amount was provided for such bonus, the employer was entitled to pay and set the bonus amount at its own discretion.”
It should be noted that KPIs may be applied only to employees working under an employment contract. If KPIs are applied to individuals working under a civil law contract, this could result in having such contracts recognized as employment contracts.
Primorsk Regional Court rendered a similar ruling on October 19, 2015 in case No. 33-9464/2015. The court dismissed the claim for unreasonable lowering of quarterly assessment for determination of bonus award, having determined that the employee had been assessed in accordance with the rules set out in the employer’s internal regulations.
Court practice on this issue shows that when a “transparent” calculation method is provided in internal regulations, courts rule in favor of companies. For example, Moscow City Appellate Court Ruling of December 22, 2015 in case No. 33-47178/2015 sided with the defendant because the internal regulations on bonus provided that “bonuses shall be paid to the company’s employees, the amount, accrual procedure and payment periodicity for such bonuses are determined based on the company’s business performance and the employee’s key performance indicators approved by an order issued by the general director.” Considering that the employer adopted no decision to pay a bonus to the plaintiff and that the assessment of the employee's performance is the manager's prerogative, the courts first dismissed the suit and then the appeal.
Sverdlovsk Regional Court also sided with the defendant in case No. 33-4325/2017 dated March 23, 2017 for validity of bonus calculation based on KPIs. The court ruled that the bonus had been paid in full to the plaintiff under the unified wage system regulations in force in the organization.
Mark up or down?
It is worth noting that the concept of “fine” for bonus calculation algorithm is out of the question. The Russian Labor Code does not provide for any fines for employers in such case so imposing any fines would be illegal. KPI regulations may contain conditions for bonus reduction or non-payment, but calculated bonuses may under no circumstances be negative – that is, it may not be withheld from the employee.
Khabarovsk Regional Appellate Court Ruling of May 25, 2017 in case No. 33-3908/2017 stated that bonuses may be reduced under applicable bonus regulations based on an official note for improper performance of work duties assigned to the employee. Salary and bonus regulations provide for no rules making salary payment terms worse than those in labor regulations. Monthly bonus payments, i.e. incentives, are set out by employers at their own discretion in order to motivate their employees, and such payments are an employer’s right rather than an obligation.
Novosibirsk Regional Court Ruling dated June 27, 2017 in case No. 33-6131/2017 recognized that not awarding to the plaintiff a bonus for 100% fulfillment of KPIs was lawful as this was done in line with the bonus policy in force in the organization, and the court established that the plaintiff did not properly fulfill his work duties based on an explanatory note, witness testimonies, internal “mystery customer” report, and audio recordings.
Like any bonus for production indicators, payments based on KPIs are subject to personal income tax and social insurance contributions. This type of bonus is part of payroll so it is recognized as a deductible expense for profit tax purposes.
Bonuses are awarded to employees on the basis of bonus orders. A standard order form (No. Т-11 or No. Т-11а) or no particular form as approved in internal regulations may be used to this end. Bonus orders must contain the following information: bonus name as per the internal regulations or employment contract, employee names and bonus amounts (the amounts must be consistent with the calculated data according to the approved algorithm), as well as the bonus period. Any bonus payable to the head of an organization (other than the sole founder) must be awarded by decision of the founder (general meeting of founders).
Although incentive systems based on KPIs have a good track record in Russia, companies should not be managed simply by “fiddling” with KPIs. It is important to remember that real employees, clients, suppliers and customers are behind each number. The real meaning of KPI numerical values should be properly understood.