Key points
- The government says the bonus culture is discriminatory against women, but has not produced any hard evidence
- Bonuses are designed to reward good performance
- Employers can pay whatever bonuses they like, subject to certain legal restraints
- It is unlawful to use bonuses to discriminate on the grounds of sex
- Employers should specify objective bonus criteria and explain individual awards to make discretionary bonuses more transparent.
Minister for women Harriet Harman has asked the Equality Commission to examine whether City bonuses discriminate against women. She describes the bonus system as a “licence for unfairness and discrimination” amid statistics that men in the finance sector are paid 40% more than women. But is sex discrimination really the reason for women being paid lower bonuses than men?
Bonuses are a fundamental element of remuneration in the finance sector. Banks pay bonuses to reward good performance and to attract and retain talent. They incentivise excellence and ensure banks keep their best people.
In principle, employers can pay whatever bonuses they like. The bonus system is a vivid demonstration of a free-market economy. However, it is unlawful to use bonuses to discriminate on grounds such as sex, age, disability, religion or race.
Most employers are well aware of this fundamental moral and legal obligation, and most know the only acceptable justification for paying one employee a higher bonus than the other is performance against known criteria.
Men and women are different in lots of ways – apart from the obvious ones – and some of those differences have a bearing on performance. Women are better at multi-tasking. Men are better at chess.
Harman assumes that the only reason a woman would be paid a lower bonus than a man is because she is a woman. Where is the evidence that women receiving lower bonuses than men are performing at the same level?
This is important because when criteria for allocating bonuses lack transparency, problems arise and employers become vulnerable to discrimination claims.
The way in which employers pay bonuses determines how they will be treated in a legal context. Some bonuses are paid across the board to the whole company, some are guaranteed under an employee’s contract of employment. Many are discretionary and based on individual and business unit performance.
Most sex discrimination claims in relation to bonus awards arise where a woman has been paid a lower discretionary bonus than her male comparator. A female employee feels she has been less favourably treated in respect of her bonus for being a woman, frequently because she is pregnant or by reason of absence on maternity leave.
Believing something to be true and being able to prove it at an employment tribunal are not the same. Nonetheless, employers often settle sex discrimination claims to avoid unwelcome publicity and the expense of tribunal proceedings.
Generally, employers can minimise the risk of bonus-related sex discrimination claims by publishing objective written criteria for bonus awards and, on an individual level, by detailed explanation of bonus decisions. If not, employers must be prepared to explain and account for disparities.
Can an employer reduce a bonus payment because an employee is or has been absent on maternity leave for part of the bonus year? That depends on the employer’s bonus scheme. If employers wish to pro-rate bonuses while women are away on maternity leave, bonus schemes should be performance-related and employees must be in ‘active service’ on bonus payment dates.
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The proposed Equalities Bill which is currently in Parliament will ban ‘secrecy clauses’ in employment contracts that prevent employees disclosing their bonuses. If Harman’s enquiry leads to legislation controlling bonuses, then employers with properly drafted bonus schemes and a record of rewarding employees for good performance should have nothing to worry about.
Ronnie Fox, principal, Fox, with additional input by Catriona Watt, solicitor
