Pay discretionary bonuses? Check plan rules, lawyer warns


In the UK, the level of discretionary bonuses reached a 9-year high. This explains the increase we’ve seen over the past two years in disputes over premium payments – a mismatch between what a company believes should be paid and the individual’s expectations of how the rules of the diet should work. We will consider this problem.

As the FT reports, bonuses are at their highest since 2013 as a share of UK revenue, as employers seek ways to pay workers for higher living costs without committing in anti-inflation wage agreements. The latest official data from the ONS suggests that employers are increasingly using discretionary rewards to compete for scarce workers, while trying to limit the overall rise in their wage bill.

Most bonus disputes stem from non-payment of discretionary bonus systems. Very often, employers think that because a bonus system is labeled as “discretionary”, it is essentially up to them to decide who gets a bonus and how much. It is only when they are challenged that they realize that their “discretionary” regime is not really discretionary at all – potentially opening conflicts with the wider workforce who may feel unfairly treated.

Equity plan specialist James Sullivan-Tailyour advises clients on drafting plans, including discretionary bonuses, and earlier James joined me via video link from the London office to discuss this. I told James that it’s a little odd that a plan labeled “discretionary” doesn’t live up to that description.

James Sullivan-Tailyour: “Yes, that’s quite right, Joe, and it might seem a bit unfair, because if a bonus system is called discretionary, it’s reasonable to assume it should be treated as discretionary , but there are a number of areas where companies can go wrong and tip what they intended to be a discretionary bonus system to something more contractual in nature, or where the scope of their discretion is limited. The first area where companies can go wrong is when a new employee joins the company, in their employment contract providing some sort of contractual right to participate in a bonus system. If so, it can really go against any discretionary bonus system rules you have in place. The rights of the employment contract will trump the rules of the bonus system unless you have carefully limited the drafting of the employment contract to ensure that the rules of the bonus system prevail. Even when a bonus system is discretionary and labeled as such, there can sometimes be a bit of a lack of consistency in the way the bonus system rules themselves work. A discretionary bonus system could continue to talk about payouts being made on a certain date rather than payouts being able to be made or could be made if poor performance conditions are met. Then the other area where there can sometimes be problems is if there is a lack of follow-up. So if a discretionary bonus system is really a discretionary bonus system, you might think that would take you all the way, but there may be legal limits to the extent to which an employer can exercise discretion entirely as he hears it. There are obviously limitations such as the obligation not to act arbitrarily or capriciously and to act honestly and in good faith, but also, sometimes, bonus rights can crystallize into contractual rights by custom and practice. . So if you think you’re running a discretionary bonus scheme but in fact you’re still paying bonuses based on particular predefined criteria every year and you’ve been doing it for 10 or 15 years, in year 16 when you suddenly decide you want to change bonus settings and take other factors into account, you may find that the law will effectively prevent you from doing so because you have created contractual rights for your employees. So there are all these areas that can limit the scope of a company’s discretion and potentially even convert what you think is a right to a discretionary bonus into something more like a contractual right.

Joe Glavina: “So what are some practical tips on how to help protect the company from litigation like this?”

James Sullivan-Tailyour: “Well, I think the first thing you need to do is make sure that the rules of your bonus system are carefully and rigorously written to make sure that all the discretions that you and your board can need to count are referenced and captured in your bonus plan documents.This is an area where we sometimes find that the drafting leaves something to be desired in a few areas.So bonus systems can often be in place in a company for a number of years and the editorial is a bit outdated.Also I think in a very good reflection on how bonuses are supposed to be calculated, and all the profit metrics that might go into it, but there isn’t the same level of detail and precision in writing when it comes to things like departures or payment dates, or other factors outside of those financial performance measures that the co nse may wish to take into account when determining the premium. So I think that’s the first thing that’s really important to get right. I think the second thing that’s really important to understand is how you communicate how the bonus system works to participants and it’s about emphasizing to participants the truly discretionary nature of the system. It’s not just the case that if we have a good financial year, bonuses will be paid, and helping participants recognize that there are wider stakeholders that the board needs to consider, and a whole host of other factors that could go into determining a bonus outcome and this can be a very useful way of mitigating the likelihood of future conflicts because participants should, at least in theory, be aware of the discretionary nature of the scheme and not just thinking that, well, if we made that amount of profit, I should get that bonus amount. The final point I would make is that it’s also very helpful if you find yourself in the position of having a dispute, that you have a very clear written record that shows how the board has been doing in previous years, and in the bonus year it is in dispute, exercised discretion properly. What can often be very unnecessary is that all the documentation is put in place to create a discretionary bonus system, but the board minutes, or RemCo minutes, are not there to support the fact that this particular year a bonus outcome was determined on a discretionary basis, or even the board or RemCo minutes point in an entirely different direction and show that over all in previous years, RemCo just looked at earnings and little else. It’s in these types of scenarios where you give potential ammunition to a litigant who might want to come and challenge the outcome of their bounty for a year.

On bonus disputes, Pinsent Masons has developed a product to help avoid bonus payment disputes. Earlier in the week, Chris Evans talked about this program in “Discretionary bonuses hit 9-year high”. This can be viewed now on the Out-Law website.


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