As we exit from a pandemic which has had a devastating effect on many lives and businesses it may seem odd to think about bonuses. Whilst many businesses are struggling to survive, many in the tech / digital / online world have thrived and some employees will be expecting a bonus. Equally, with predictions of the largest surge in growth in the economy since the end of the Second World War many more will be contemplating their own bonus potential at the end of the current financial year.
A recent employment tribunal decision Hanson v SAS Software highlighted a number of important points.
Mr Hanson had concluded a deal worth $27 million over five years. He argued that his Compensation Plan entitled him to commission of £800,000. SAS paid him £300,000 and relied upon the following clause
“Any pay out over 300% of On Target Variable Pay (OTVP) is subject to review and approval by the Executive Vice President (EVP) and Chief Sales Officer (CSO)…”
He had overachieved all the elements of his commission plan by 500% (New Sales Credit); 200% Total Operating Revenue and 100% Annual recurring Revenue. 300% of OTVP entitled him to £288,000. In attempting to resolve the dispute SAS offered an additional £100,000, payable by instalments, which was rejected.
The Tribunal found that the contractual term was certain, that once the 300% limit had been reached it was a condition precedent to any additional payment that it be reviewed and approved by the EVP and CSO, it refused to incorporate a term that the review and change be on fair and reasonable grounds.
The Tribunal noted that:
The test of whether an employer has exercised its discretion properly is one of irrationality or perversity. The threshold which the employee needs to achieve is set very high.
The receipt of higher bonuses in previous years does not necessarily assist the employee’s argument.
Even if the perversity / irrationality threshold cannot be met, an employee may be able to import “Braganza” unreasonableness to demonstrate that the employer failed to take account of relevant factors / took irrelevant factors into account.
The principal recognised in an earlier decision involving Commerzbank that if an employer has paid a meaningful bonus then the onus on the employee of establishing perversity will be very high.
In this case there were many factors supporting SAS’ decision, the profitability of the deal, the value of the deal compared to the UK Company’s profitability, the fact that the 300% barrier had been breached. The employment judge noted that, the contractual provision limited earning to three times normal remuneration, given that multiple it was difficult to say that it was perverse and there is nothing irrational or perverse in seeking to maximise profits.
Accordingly, the claim was struck out.
As we enter a potential economic boom, it would be prudent to review bonus plans to ensure that they have been appropriately drafted to avoid employees securing an unintended windfall. Clauses that limit bonus to a cap subject to additional review will helpful to ensure windfalls are avoided. In addition where discretion is to be exercised employers should make careful notes to record the basis upon which their discretion was exercised and the factors that were taken into account, importantly employers should be careful not to take account of those factors that are irrelevant.
If an employer is considering not making any payment of discretionary bonus to an employee who has otherwise qualified for payment, the employer should recognise that there will be a greater burden on it to justify the payment of a nil bonus than if it had paid a meaningful but reduced bonus.
Importantly, if bonus payments are to be at a reduced level this year, because of the impact of the pandemic, it would be prudent for employers to explain before bonuses are announced that the bonus pool is reduced and/or that average bonus payments will be lower than normal. Setting expectations will be helpful in avoiding disputes and maintaining an engaged workforce.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.