Letter of the law

When a senior employee commences employment with a new employer, the obvious focus for discussions over the contract is the annual salary. However, there are a number of issues relating to bonuses, commission and pay review which ought to be considered and dealt with clearly in the documentation to avoid any difficulties in the future.

Bonuses

Many executive packages have a bonus scheme in addition to annual salary. Bonuses usually relate to both the performance of the individual and their employer. The key issue is whether or not bonuses are a contractual entitlement. If they are intended to be discretionary (both in terms of the amount and whether or not they are given) this should be made clear in the documentation. Even so, there have been a number of cases where courts or tribunals have taken the view that, over time, a custom and practice arrangement has been established whereby an individual has a legitimate expectation and, in some cases, a contractual entitlement to a bonus. If discretionary bonuses are being made, an employer should ensure that there are annual variations in how it is dealt with to avoid any such argument arising.

Useful devices including having “on target” bonuses as well as maximum amounts (usually a percentage of annual salary). It is also useful to be able to link the level of bonuses to objective appraisal systems to explain why the level may fluctuate. Some contracts of employment deal with eligibility for bonus during periods of long absence (such as sickness) to avoid the rather unpalatable situation of an individual returning from a long leave, only to claim a bonus.

Commission

Employers should be careful when drafting commission schemes because they can be held to the terms of the scheme once communicated to employees and relied upon. A court or tribunal would look sceptically at any provision which allowed unilateral variation by the employer. Of particular interest will be whether commission becomes payable on “bookings” of business or on receipt of monies from such business or otherwise. There may also be deductions applicable, such as cross-charges. Of crucial importance will be what happens if an individual leaves the employer, or is moved from one commission-earning account to another. Employers also need to look carefully at what should happen to individuals who are absent for lengthy periods.

Pay reviews

It is common for senior executives to have a pay review clause in their contract which obliges the employer to uplift annual salary by at least an inflationary amount. This is usually done by cross-referring to the Retail Prices Index. If there is a salary review clause, it will oblige the employer in good faith to review the salary situation, but not necessarily to increase the salary. This is often expressly written into a contract of employment.

Conclusion

Employers should be careful about setting out rules for bonuses, commission and pay reviews. From 1 July 2000, they should also look especially at the position of part-timers because of the forthcoming duty to treat part-timers equally with full-timers – on a pro rata basis – unless they can justify disparate treatment on objective grounds.

by Russell Brimelow Head of the employment group Boodle Hatfield 020-7318 8135

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