A recent High Court case reinforces the employer's hand in determining performance-related bonuses. It confirms that employees will struggle to get a Court to overturn an employer's decision unless it is irrational or perverse, which will in many cases be a high hurdle to overcome.
Facts
In this case (Humphreys v Norilsk Nickel International (UK)
Ltd), Dr Humphreys was employed as a chief economist of a precious
metal mining company. The amount of his annual bonus was determined
by his employer's assessment of his performance on a sliding
scale of 1 (unsatisfactory), which meant no bonus was payable, to
(6 "superior or exceeding expectation on 100% of agreed
objectives"), which meant the maximum amount of bonus became
payable. Dr Humphreys' objectives were summarised at the end of
his contract, though the list was not expressed to be exclusive,
nor were any objectives given a numerical weighting.
Dr Humphreys' forecasts for nickel prices (part of his duties)
were more than 50% off actual prices in the last quarter of 2008.
These contributed to business decisions being taken (or not being
taken) causing the business substantial losses. On this basis, Dr
Humphreys' performance was assessed by his employer at grade 1
for the relevant year, which meant no bonus was payable.
Dr Humphreys challenged the decision arguing his performance had
been satisfactory in the circumstances (which would have meant he
achieved a higher grade earning him a bonus), listing the work he
had done in the year and the praise he had received. He also said
it was not his fault that the global economic crisis led to his
forecasts becoming inaccurate. He further asserted that other
leading economists in the precious metals industry had also
provided forecasts which proved similarly inaccurate, which should
be relevant in providing a benchmark for his performance.
Decision
The High Court rejected Dr Humphreys' claim. Taking into consideration his employer's financial position, his inaccurate forecasts which had contributed to that and the objectives he had been set, the employer's assessment of his performance and its consequent decision not to pay a bonus was in accordance with the express terms of the contract and perfectly rational. For Dr Humphreys' claim to succeed, the employer's decision needed to be irrational or perverse. Whether his overall performance or performance in other areas had been objectively sufficient to justify payment of a bonus was not the relevant question. The employer's decision would not be disturbed so long as it was taken in accordance with the provisions of the contract and was not perverse or irrational.
Comment
The decision in this case is not really surprising. A good
economist would have earned plaudits by predicting the collapse in
prices. However, the case is a good illustration of the tension
between valuing "inputs" (the amount of effort etc which
an employee puts into his job, which is what Dr Humphreys tried to
emphasise and seek reward for) and "outputs" (the impact
of contributions). A wise employer makes sure that it can take both
into account and allow one to outweigh the other.
The case is also relevant for companies with share plans where
there is a specified target (say total shareholder return) but the
Remuneration Committee also has the discretion not to allow receipt
of shares unless there is "underlying financial
performance". This case would appear to support an
employer's use of that discretion to reduce an employee's
receipt without too much justification.
For a link to the High Court case report please click here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 29/10/2010.