The Bonus & Compensation
Seminar
2nd December 2009, Garden Court Chambers, Lincoln’s Inn Fields
Bettina Bender, Partner
CM Murray LLP
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Bonuses
• Banking and Financial Services Sector: a different pay
structure is typical
• Comparatively low base with large bonus
• Why is this contentious?
• Recent banking crisis – large bonus culture blamed for
excessive risk taking
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Proposed Controls on
Remuneration
•
Walker Report - (to review the corporate governance of banks) 39 recommendations to
improve how banks are run, incl. publishing statistics on number of bankers earning over
£1million, half of variable pay to be awarded in shares to vest over five years
•
Treasury Announcement on 30 November – start of consultation on whether legislation
should go further than Walker Review
•
Financial Services Bill – contracts can be torn up if guaranteed bonuses are payable and
•
FSA Code on Remuneration – guaranteed bonuses for >1 year non-compliant with
excessive risk has been taken – yet to be enacted – query May election? – 2009 bonuses not
affected: “bumper year for banks”
Code (must be amended by end 2010)
•
G20 remuneration reforms – up to 60% of bonus payments to be deferred over 3 years, clawback arrangements for failure to perform
•
Financial Reporting Council – review of corporate governance of UK listed companies
published 1 December; possible annual re-election of non-exec as well as chairman; new
corporate governance code to take effect June 2010; (looking at the role of shareholders and
boards in controlling risk)
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Why pay a Bonus?
• A Reward for Performance
• A Guaranteed Bonus (e.g. Signing on Bonus, Retention
Bonus)
– on the rise again to attract and retain key performers;
often payable irrespective of performance and agreed
to compensate employee for leaving deferred
incentive arrangement at previous employer; NB no
risk management for the bank)
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The Performance Bonus
• Is it contractual?
• Is it discretionary?
• N.B. a discretionary bonus can become contractual over
time
• Is it a hybrid? (there is a contractual entitlement but the
amount payable is discretionary)
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The Performance Bonus
• Is it Cash-based
• Is it payable in Deferred Compensation (e.g. shares
options, long term incentive plans etc.)
• Is it a Combination
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Termination of
Employment and Bonuses
• What happens on termination (with or without cause) or
employee resignation
• Is the bonus forfeited
• Is a pro-rated bonus payable
• Is the full bonus payable
• Good leaver/Bad leaver
• What happens if the employer terminates in order to
avoid paying a bonus otherwise due?
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Issues to look for
• Does a Bonus Plan exist
• What does the Contract/Staff Handbook say
• What is the Bonus Year
• When is the Bonus declared
• When is the Bonus payable
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Performance
• Is it Company Performance
• Is it Individual Performance
• How is it measured
• Who decides?
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Bonuses and Exercise
of Discretion
Case Law to Date – A Recap
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Lavarack v Woods of Colchester Ltd
[1967] 1 QB 278, [1966] 3 All ER 683, CA
Facts:
L was employed by W Ltd for a term of 5 years from 1 April 1962 on a basic
salary and such bonus (if any) as the directors “shall from time to time
determine”. On 27 July 1964 L was dismissed. In 1965 the company
revised their salary structure, ending the bonus scheme. L claimed wrongful
dismissal claiming damages for loss of salary under the contract and an
additional sum representing the salary increase he would have received had
he not been terminated.
Held (CA):
A dismissed employee could not seek compensation for loss of benefits to
which he was not contractually entitled and the employee was not entitled to
claim the sum he would have received by way of increase in salary in lieu of
bonus.
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Clark v BET plc [1997] IRLR 348
Facts:
C had a contract which provided that he would participate in a a bonus
arrangement providing a maximum of 60% of salary in any year. C was
dismissed and claimed compensation in respect of salary increases and
bonus payments he would have earned during his 3 year notice period.
Held (High Court):
The Court was prepared to include anticipated salary increases and bonus
payments when calculating damages in respect of the notice period. A
discretion to award a bonus should not be exercised 'capriciously’.
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Clark v Nomura International plc
[2000] IRLR 766, QBD
Facts:
C was employed as senior proprietary trader in equities with a discretionary
bonus scheme, based on individual performance. On 13 February 1997, NI
dismissed C on 3 months’ notice to be served as garden leave but paid him
no bonus on bonus payment date of 25 April.
Held (High Court):
Whilst the dismissal itself was not wrongful, the discretionary bonus would
have been due for payment during the notice period (the employee might
have expected to receive £1.35m). There would be a breach of contract in
relation to an unfettered and absolute discretion if no reasonable employer
would have exercised the discretion in that way. This is the test of
irrationality and perversity.
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Horkulak v Cantor Fitzgerald
International [2004] EWCA Civ 1287,
[2004] IRLR 942
Facts:
Mr Horkulak was promoted to Senior Managing Director in Aug 1999 on a 3
year fixed term contract with discretionary bonus. He resigned in June 2000
claiming constructive dismissal, on the basis of the bullying behaviour of the
President of CF.
Held (CA):
• A term will be implied into an employment contract that a discretion will be
exercised bona fide and rationally. Lord Justice Potter said to do otherwise
would to fly in the face of principles of trust and confidence which have been
held to underpin the employment relationship. Mr Horkulak was on a 3 year
fixed contract. If this contract had been lawfully performed, he would still
have been in employment at the time that the bonuses were payable.
• Distinguished from Lavarack v Woods as Mr Horkulak was already entitled
to a bonus payment under his scheme.
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Commerzbank AG v Keen 2007
IRLR 132
Facts:
Mr Keen was head of the proprietary trading desk for just under three years
and was made redundant June 2005. He participated in a discretionary
bonus scheme (with forfeiture provision). His claim was for underpaid
bonuses for 2003 and 2004 and non-payment for 2005.
Held (CA):
Employers do have a wide discretion but this must not be irrationally,
perversely or arbitrarily exercised. The burden of establishing that no
rational bank would have exercised their discretion in a certain way was a
very high one.
UCTA 1977, s.3 does not apply to employment contracts at least insofar as
they apply to bonuses.
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Takacs v Barclays Services Jersey
Limited [2006] IRLR 877.
Facts:
T joined BSJ in Nov 2003 on a contract with a min guaranteed bonus and a
further bonus sum payable if credits of £20million were achieved. T was
dismissed with 4 weeks’ notice by letter dated 15 November 2004 before
the end of the bonus year and before the deal he was working on could be
closed.
Held (High Court):
The employee could pursue a claim that the employer had breached the
implied term of trust and confidence by hampering T’s efforts to achieve the
sales target and could further pursue the argument that the employer would
not to terminate the contract, in order to avoid its bonus obligations, prior to
the payment date. The Court decided, at a preliminary hearing, that Mr
Takacs had a real prospect of showing that this implied term existed, and
that the term could supplement rather than be inconsistent with the
employer’s express contractual right to dismiss with notice. This case
settled so it will be for another employee to make this argument in the
future.
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Fish and others v Dresdner Kleinwort
Ltd [2009] IRLR 1035 (QBD)
Facts:
The claimants were part of the senior management team of DK. During
2008 discussions took place regarding the sale of DK to Commerzbank. In
a bid to retain key staff they were notified of their bonus payments for 2008.
Due to the financial crisis and the falling value of DK and financial difficulties
of Commerzbank the purchase price was renegotiated and sale brought
forward to Jan 2009 and the employees were to be terminated. The new
management decided to substantially reduce the 2008 bonus awards given
due to the dire financial outlook.
Held (High Court):
Where a contractual right to a bonus is established, the employer must pay
this, even if it is not in the employer’s best interests to do so. An employer
cannot argue that an employee’s express, implied or fiduciary duty to act in
the employer’s best interests requires them to forego a sum that is
otherwise due under their contract.
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Litigating a Bonus Claim
• What are the options
• Forum
• Costs and Time
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Deduction of Wages
•
Section 13(3) of ERA
“where the total amount of wages paid on any occasion by an employer to a
worker employed by him is less than the total amount of the wages properly
payable by him to the worker on that occasion (after deductions), the amount of
the deficiency shall be treated for the purposes of this Part as a deduction made
by the employer from the worker’s wages on that occasion.”
•
•
•
•
Wages includes Bonus (Section 27(1) of ERA)
Employment Tribunal claim within 3 months of termination of employment or
date of deduction
The Bonus must be quantifiable (Coors Brewers Ltd v SP Adcock and Ors
[2007] EWCA Civ 19 24 January 2007)
Awards made under Section 13 of the Employment Rights Act 1996 are not
limited by the compensatory award ceiling and a claim for >£25,000 can be
brought in the ET
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Tradition Securities and Futures S.A. v
Mouradian [2009] EWCA Civ 60
Facts:
M was a senior broker on the fixed income desk where he managed a team of brokers. In
September 2004 he entered into a 4 year fixed term contract. Under the terms of the
contract he was to be paid from a bonus pool of 60% of net billed income less appropriate
deductions to be divided as he thought appropriate after consultation with the CEO,
payable in cash or into a retirement scheme or employee benefit trust. For the period July
to December 2007 M had allocated £100,000 bonus to his team, the remainder to be
payable to himself. The bank declared a bonus pool of £1,429,00.60 after deductions
including a deduction of £154,286 disputed by M. The net shortfall to M was £92,571.60.
M brought an unlawful deduction of wages claim in the ET. The issue in question was
whether the amount in dispute was a quantifiable sum.
Held (CA):
The Tribunal were entitled and obliged to make certain findings of fact and in this case
determined that M had sole discretion as the both the amount of bonus and the form of his
bonus. The claim could accordingly be heard under the deduction of wages provision.
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Breach of Contract Claim
• Employment Tribunal claim within 3 months of the termination of
employment
• NB: maximum award is capped at £25,000
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Wrongful Dismissal Claim
• County Court or High Court
• Can be brought up to 6 years after termination of employment
• Damages in the County Court are limited to £50,000 but in the High
Court these are unlimited
• High Court action: protracted and expensive
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Discrimination Complaint
• Employment Tribunal claim that a bonus scheme has been operated
unlawfully in contravention of discrimination legislation (sex, marital
status, pregnancy, race, disability, sexual orientation, gender reassignment, age, and religion and belief or less favourable treatment
as part-time worker or fixed term employee)
• Can be brought within 3 months of the discriminatory act or 6
months in an equal pay case
• Compensation uncapped but loss based
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Unfair Dismissal Claim
• Employment tribunal claim within 3 months of the dismissal
• Compensatory awards are capped (currently £66,200)
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Factors the courts
will consider:• Is the scheme contractual or discretionary
• In a discretionary scheme what has been past practice on payment
of bonuses
• Are there set pre-conditions the employee is required to meet
• How is actual bonus award arrived at – what is the calculation used
and what are the award criteria, e.g. performance
• If performance is a factor, how is this measured?
• What is said to be the rationale behind the bonus – is it to incentivise
for the future, for past performance or a combination of the two
• Are good leaver/bad leaver provisions operated
• Has any commitment been given to the individual during the bonus
year?
• Are there any published explanatory notes/guidelines?
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Maternity Leave and Bonus
Payments
•
•
•
•
•
•
•
If a woman takes maternity leave is she entitled to a bonus otherwise payable?
If so, is she entitled to a pro-rated amount of the full bonus level?
This area covered by Employment Rights Act 1996, Maternity and Parental Leave
Regulations 1999, the Equal Pay Act 1970 and the Sex Discrimination Act and Article
141 of the EC Treaty
The general principle is that retroactive pay for work done can be reduced pro-rata to
take account of maternity leave absences
The two week compulsory maternity leave period must be treated as working time
An employee on OML is entitled to benefit from the terms and conditions which would
have applied if she had not been absent, excluding remuneration (and employees
now enjoy the same rights during AML as during OML).
Only sums payable to the employee “by way of wages or salary” are to be treated as
remuneration (Reg 9 (3) Maternity and Parental Leave Regulations 1999 (MPL
Regs).
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Maternity Leave and Bonus
Payments
Position on Discretionary Loyalty Bonuses is not straightforward
•
•
Gus Home Shopping Ltd v Green and McLaughlin [2001] IRLR 75
The EAT ruled that a discretionary loyalty bonus must be paid in full.
•
In Hoyland v Asda Stores Limited [2005] IRLR 438 all eligible employees
received a bonus less tax and NI and a percentage was paid into the
employees’ pension plans with an equivalent contribution from Asda. The
EAT held that this was to be treated as “wages or salary” and therefore
“remuneration”. Asda was entitled to make a pro-rata deduction to reflect
the time the employee was absent on maternity leave.
•
It remains unclear whether a truly discretionary bonus would qualify as
“wages or salary”.
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Maternity Leave and Bonus
Payments
• Bonuses can qualify as pay within the meaning of Article 141 of the
EC Treaty which guarantee equal pay between men and women
• ECJ law makes clear that the purpose of the bonus, not when it is
paid, determines whether a woman should receive it during
maternity leave
• Where a bonus paid is in relation to past performance and the
employee in question was absent on OML and AML for some of that
bonus year you can pro-rate the bonus.
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Lewen v Denda [2000]
IRLR 67 ECJ
Facts:
L had been employed with D for approx 6 years when she became pregnant. D
usually paid a Christmas bonus equivalent to one month’s pay. The bonus was
expressed to be a single voluntary benefit which could be revoked and which was
repayable if the employee left. In Germany women are not allowed to work 6 weeks
before the EWC and 8 weeks after childbirth. German law also provides for 3 years’
parental leave which can be taken by either parent. During parental leave the
contract is suspended and no remuneration payable.
ECJ held:
A Christmas bonus constituted pay. An employer could not simply refuse to pay a
bonus to a woman on maternity leave, where it constitutes retroactive pay for work
done. However, it can make a pro-rata reduction to take account of the leave,
ignoring any time when the employee is prohibited from working, thus making a prorata allocation of bonus. ECJ did however also rule that non-payment of a bonus
during maternity leave would not be in breach of Article 141 where the only condition
is active service at the time of payment.
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Part-time workers
• Under the Part-time Workers (Prevention of Less Favourable
Treatment) Regulations 2000, part-time workers bonuses should be
pro-rated
• Different treatment will only be lawful if it can be objectively justified
(relying on this will be difficult)
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Conclusion
•
Goldman Sachs boss Lloyd Blankfein recently said that “bankers did God’s work”
(Sunday Times 8 November 2009)
•
Lord Myners, Financial Services Minister reportedly responded to this on 25 Nov
2009 in a speech to investors at Council of Christians & Jews City Seminar (copy on
HM Treasury website): "He (Mr Blankfein) seemed to some to be on a different planet
to the rest of humanity; ignoring a year of record losses, of dangers and damage.
Blankfein appeared to have lost sight of the impact the crisis had on ordinary people
and their anger at perceived personal excesses expressed as entitlement by those
implicated. (…) Yet the reality is that many people are dismayed by the continuing 'tin
ears' of those who seem to operate with a 'heads I win, tails you lose' mentality.”
•
The Centre for Economics and Business Research recently estimated that £6 billion
will be paid in bonuses in the City this year (compared with £4 billion last year).
•
Banking Bonuses – Business as Usual?
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Speaker Details
If you have any questions, please do not hesitate to contact:
Bettina Bender, Partner
CM Murray LLP
37th Floor
One Canada Square
Canary Wharf
London E14 5AA
United Kingdom
Phone: 00 44 (0)207 718 0090
Email: bettina.bender@cm-murray.com
Website: www.cm-murray.com
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