Employment Knowhow: Bonuses and deferred remuneration

When entering a contract the parties are often optimistic about the payment of bonus and insufficient attention is paid to the wording.

Bonuses are often described as “discretionary” which in general means that the amount of the bonus payable each year can vary. Discretion can be restricted though where an employer identifies targets for an employee to meet. In those circumstances whilst the employer has the discretion to change the targets year on year, it has exercised its discretion to set the targets for the year and provided the employee meets those targets the bonus should be paid.

Commonly the contract provides that bonus will not be payable if, by the payment date, the employee has given or received notice. This can lead to a particularly harsh outcome if an employer gives notice immediately prior to the payment date which commonly will be two or three months after the calendar year by which time the employee has a legitimate expectation that they will receive a bonus. In general such clauses are enforceable and therefore employees should seek to negotiate, on commencement, that bonus will be payable unless they have given notice by the payment date or they have been terminated for Cause.

The grounds upon which a bonus can be challenged (when described as discretionary) are limited. In general, an employer must act reasonably and rationally. Employers will often argue that bonus rewards past performance, but also motivates future performance and therefore if by the payment date the employer has decided to terminate, they will often seek to avoid paying any bonus even though the bonus year has been completed and the performance might otherwise warrant payment. Challenging the amount of a bonus is far more difficult than challenging to failure to pay any bonus.

Form of Bonus

Often a bonus will be a mixture of cash and deferred remuneration which might be linked either to a Long Term Incentive Plan (“LTIP”) or there may be a “virtual” share award (RSUs). Commonly deferred remuneration will vest over a three year period.

In general if the employee or employer gives notice in the vesting period deferred remuneration is forfeited. The exception is where the employer terminates for redundancy or disability. In such circumstances it is common for deferred remuneration to vest on the usual dates and in exceptional cases there can be accelerated vesting.

Bankers’ Bonuses

From 1 January 2017, for all “code staff” (those identified as senior managers and having significant influence) there has been a cap on bonus at 100% of salary (generally, although this can increase to 200% with shareholder approval) with a requirement that a proportion of the bonus is deferred for at least five years. Some banks are already taking steps to undermine these provisions by paying either “monthly allowances” or other top-ups or increasing basic remuneration.

Bonuses and Absence

Absence is a factor that an employer is legitimately entitled to take into account whether or not it is by reason of sickness or maternity leave (subject to certain exceptions). Generally in the case of maternity leave, bonus should be paid pro rata for the time within any bonus period during which the employee worked, and additionally the two week period during which the individual was on compulsory maternity leave.

This page was updated on the 1st August 2018.

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of August 20, 2018.