What is the extent of an employer’s discretion when making bonus decisions? We already know that discretion is not completely unfettered, and that employers must not act in a way that is irrational or perverse when making bonus decisions. But does that authorise an employer to award no bonus whatsoever?
In Ridgway v JP Morgan, the High Court decided that the bank was entitled to award a ‘nil’ bonus to a trader who had spent most of the bonus year on sabbatical.
Mr Ridgway, who headed up the bank’s options desk, took an unpaid sabbatical starting in April 2003. One of the terms of the sabbatical agreement was that Ridgway would continue to be eligible for a discretionary bonus for the year ending December 2003. At the end of the bonus year, the bank awarded Ridgway a nil bonus.
On his return from sabbatical, Ridgway’s previous job was unavailable, and he and the bank failed to agree on an alternative role for him. Ridgway resigned and claimed constructive dismissal. He claimed compensation for his bonus on the basis that the bonus decision was irrational and perverse, as well as compensation for stock awards that he lost as a result of resigning.
The High Court dismissed all of Ridgway’s claims. In relation to the bonus claim, it followed the guidelines for the award of discretionary bonuses set out in the recent Court of Appeal decision of Commerzbank v Keen. In Commerzbank, the Court of Appeal said the hurdle is set very high for an employee to show that a bonus decision is irrational or perverse. However, the Court of Appeal also said an employer must identify the reason for a bonus award and the decision maker.
The High Court said the bank had been entitled to award Ridgway a nil bonus after taking into account the fact that he had been on sabbatical for most of the bonus year. The bank had also taken into account the fact that Ridgway had been making a loss when he went on sabbatical, that his ‘add-on’ contribution was very limited, and that there were no other factors to justify awarding a bonus.
The court endorsed Commerzbank and said the task of proving irrationality or perversity in the exercise of the bank’s discretion to award a bonus is a “daunting one”.
Following the Commerzbank and JP Morgan decisions, courts will be reluctant to intervene in bonus decisions except in exceptional cases. However, bonus decisions are subject to challenge where the decision appears irrational and/or where the decision-making process is not transparent. Employers should be mindful of the following when making discretionary bonus decisions:
Properly and fully consider whether to award a discretionary bonus and, if so, the amount of the award.
Ensure the decision-making process is transparent and provide reasons why the bonus was assessed at the level it was so that the employee has an understanding as to how the figure was reached.
Tell the employee who made the bonus decision.
Review bonus wording to ensure it provides the level of discretion required (subject, of course, to the legal limitations set out above).
By Judith Harris, professional support lawyer, Addleshaw Goddard
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