UK: Wealth And Safety - Defending Bonus Decisions

Last Updated: 17 January 2001

If a bonus payment is discretionary, what rights does an employee have to it? Does it depend on why the employer chooses to reduce or withhold it, or whether the individual has left the Company?

" Discretionary" should on its face mean that the employer can give or withhold it on a whim, but this principle is increasingly under attack in the Courts. In the Employment Tribunal unfair dismissal compensation is already assessed by reference to the employee’s losses including that of any benefit which he might reasonably be expected to have had but for the dismissal. Clearly a discretionary bonus could fall into that category, especially if there were a history of previous payments or evidence of similar figures paid to the ex-employee’s colleagues. However, unfair dismissal compensation is generally limited to £50,000 and some employees expect much larger bonus figures. The focus has therefore turned to the pursuit of discretionary bonuses in the High Court.

Although much attention has been paid to the recent high profile decision of Clark –v- Nomura International (dismissed trader awarded £1.35 m by way of discretionary bonus) the issue is not in fact a new one. In 1997 the Court of Appeal awarded Mr Clarke (no relation) compensation against BET for loss of discretionary bonuses 3 years into the future after his dismissal by BET in breach of his 36 month notice entitlement. BET argued that if it had given Mr Clarke proper notice it would have exercised its discretion so as not to pay him any Discretionary bonus at all. However, the Court held that given Mr Clarke ’s good performance record, the employer’s exercise of its Discretion in that way would be a breach of the implied obligation of trust and confidence, or active bad faith, and in either case a breach of contact.

The same principles applied in the Nomura case. Mr Clark’s letter of appointment stated that his bonus was discretionary, but dependent upon his individual profitability. In his first year he made very substantial profits for Nomura and had received a bonus of over £2.5m for doing so. He was dismissed part way through his second year on grounds including shortcomings in his corporate contribution and team working, inappropriate dress and using a mobile phone at his desk. Nomura chose not to pay him any bonus for the part year in question, claiming that Mr Clark’s conduct entitled it to exercise its discretion against him and that his dismissal meant that the usual retention and motivational reasons to pay a bonus no longer applied. The High Court found that none of the conduct matters relied upon by Nomura had been mentioned to Mr Clark before he was dismissed. This no doubt supported the Judge in his conclusion that none of these issues justified the dismissal. Moreover, none of them affected his individual profitability. Against that background the Court held that the failure to pay Mr Clark a bonus was "perverse and irrational" . Nomura’s purported exercise of its discretion was therefore unlawful. This should be contrasted with the earlier decision in Midland Bank Plc –v- McCann. Here the Bank chose not to pay discretionary bonuses to redundant staff on the basis that the necessity to incentivise them had obviously disappeared. The Court concluded that this use of the Bank’s discretion, though "hard-nosed", was not commercially irrational and was therefore valid.

The Court ’s reasoning in the Nomura case would seem valid whether or not the individual is still employed, and whether the bonus is withheld altogether or merely much smaller than the employee expected. So what lessons should employers take from it?

1 . If it is intended to take non-financial factors into account when considering discretionary bonuses, the contract should say so.

2 . Where the employer believes the employee’s conduct or performance to be substandard, it should bring this to his attention at the earliest opportunity.

3 . If the employee would be disqualified from receipt of a bonus by the termination of his employment, the contract should make this clear (though such a provision may vulnerable to attack under the Unfair Contract Terms Act 1977).

4 . The bonus calculation process has to be as transparent as possible so that the employer can justify the end results both in absolute terms and relative to the employee’s colleagues.

On the face of it there is no reason why the Judge’s conclusions in the Nomura case should not apply to other discretions – pay reviews, option awards, disciplinary sanctions etc. Whether an employee would consider High Court proceedings worthwhile in such cases remains to be seen. It is however evident that the employer’s best defence will be the ability to demonstrate reasoning in the exercise of any discretion which is so far as possible, objective and commercially rational.

Stop Press

4 September 2000 A workers right to be accompanied at a disciplinary/grievance hearing by a trade union representative or fellow worker come into force.

18 September 2000 Regulations relating to industrial ballots and notices come into force .

1 October 2000 Increase in minimum wage to £3.70 from £3.60 (adult rate).

2 October 2000 Human Rights Act and Regulation of Investigatory Powers Act come into force .

24 October 2000 Lawful Business Practice Regulations expected to come into force.

The information and opinions contained in this publication are provided by national law firm Hammond Suddards Edge. They should not be applied to any particular set of facts without seeking appropriate legal or other professional advice.

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