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Bumper bonuses promised, but what are the limitations?

Posted: 14/03/2022

It is widely anticipated that the banking sector will award the biggest bonus payments since the global financial crash of 2008, with a post-pandemic talent war taking place against a background of increased M&A activity and signs of global economic recovery.

London’s four biggest banks are expected to collectively pay out in excess of £4 billion, and this trend is likely to be seen beyond the UK.

Individual entitlement to a bonus depends on many factors, the starting point of course being the contract of employment, and the wording of any bonus scheme.

The following are the key challenges that can be raised:

Entirely discretionary
Bonuses are typically expressed to be discretionary, although an award may take into account factors such as individual or company performance, and the size of the overall bonus pool.  

It is important to note that even where bonuses are expressed to be entirely discretionary, the employer’s discretion is not unfettered, and must not be exercised in a manner that is irrational or perverse. This test is more than merely ‘unreasonable’, but it does give those who receive no bonus, or a bonus which is smaller than expected, a route to challenge an apparently discretionary award.

Custom and practice
Custom and practice can also be a factor where an executive can expect to receive a bonus comparable to that awarded in previous years, taking into account all relevant factors, for example, performance. A well drafted bonus scheme will, however, typically make clear that payment of a bonus in one year does not create a right to an award in any subsequent years.

Awards can also be challenged on discrimination grounds, for example, a female executive receiving a lower award than her male peers. There are many examples of such claims, most recently the widely reported case of Stacey Macken, whose claim against BNP Paribas resulted in an award of over £2 million in respect of underpayment of salary and bonuses, in comparison to her male colleagues.

What if you are leaving? Good and bad leaver provisions
Many bonus schemes will distinguish between good and bad leavers, with the latter receiving no bonus and the former receiving some or all of their award. The definitions of good and bad leaver will often be crucial and can vary from scheme to scheme.

Good leavers, however, tend to be those who leave due to ill-health or redundancy, whereas bad leavers will leave as a result of capability or conduct issues, or to join a competitor in breach of post-termination restrictive covenants.

If you are considering a move to a new employer, or have been given notice by your current employer, you should check carefully whether this will invalidate your claim to a bonus. Similarly, a payment in lieu of notice (PILON) clause that covers basic salary only should be treated cautiously – exercising such a clause may mean that an employer can lawfully terminate employment with immediate effect, and deprive you of the right to a bonus – although, there may be separate grounds for unfair dismissal.

You should also be aware that being on a period of garden leave, or under suspension, could affect your entitlement to a bonus.

Financial services regulation and the bonus cap

Those firms that are subject to a professional regulator such as the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) are of course subject to additional constraints when it comes to bonus awards.

Remuneration Code
In response to the financial crisis, in 2010 the Financial Services Authority (now the FCA) implemented the original Remuneration Code. The purpose of the code was to encourage effective risk-taking and reduce short-termism through regulating remuneration.

Initially, the code applied to 26 of the largest banks, building societies and broker dealers, and currently more than 7,000 regulated firms are captured under one or more of the remuneration codes and the various supplementary guidance notes, supervisory statements, and opinions.

The bonus cap
In February 2016, the PRA and FCA jointly announced a requirement on regulated firms to comply with the European Banking Authority (EBA) guidelines, including the ‘bonus cap’, intended to incentivise positive behaviour and appropriate conduct culture. The effect of the cap means that the variable pay of ‘material risk-taskers’ should generally not exceed 100% of fixed pay, save in certain circumstances.

The introduction of the bonus cap was a controversial move, and its removal has been back on the agenda as, post-Brexit, questions have been raised about the attractiveness and competitiveness of London in the financial services sphere.

Many in the financial sector are taking the opportunity to appeal to the Chancellor to review and remove the bonus cap; however, it is not thought to be on the political agenda currently, although remuneration reform may be considered in the future.

Ex-post risk adjustment
In addition to the bonus cap, financial services firms must be careful not to have pay structures in place which can be seen to reward ‘bad behaviour’, a euphemism for misconduct, regardless of whether employees have met their financial targets.

Deferred bonus, clawback and malus clauses
Measures such as deferring part of a bonus over three years, along with clawback and malus clauses in contracts, all serve to promote a healthy approach to risk taking and foster a positive working culture.

The FCA recently updated its 2015 guidance to the MIFIDPRU Remuneration Code on ‘ex-post risk adjustment’, with the changes coming into force from 1 January 2022. Significantly, the new guidance potentially impacts a far greater number of professionals working in the financial services sector than previously.

Extended scope
Not only does it extend the scope of the original guidance to FCA investment firms under the MIFIDPRU Remuneration Code in SYSC 19G, it also broadens the potential application of ex-post risk adjustment, firstly to those who have committed misconduct themselves, but also to those occupying senior roles or control functions such as risk or compliance.

Up to 100% ex-post risk adjustment
The guidance suggests that the starting point should be up to 100% ex-post risk adjustment for cases with a high degree of personal responsibility. Where the personal responsibility is lower, a proportionately lower adjustment would be appropriate.

In all cases, firms must ensure that any performance adjustment reflects the severity of the relevant event, is material in size and is sufficient to drive positive individual behaviours and culture within the firm.

Although the primary focus on applying performance adjustment should be on individuals, it can be also applied collectively at bonus level, and this may be appropriate where there have been widespread failings.

Challenging an award
Mounting a legal challenge to a bonus award, or lack of one, requires expensive and risky High Court litigation, which many will be reluctant to bring, particularly where they remain in employment.

Litigation, however, is a last resort, and there are other options to explore, such as raising a formal or informal grievance, bringing a complaint under the terms of the bonus scheme, if this exists, or simply raising the possibility of a claim, then seeking to negotiate.

In many cases, employers will be very reluctant to make public their bonus payments, which would be disclosed as part of any litigation, and this can often encourage settlement of a potential claim.

If you would like some advice on your particular situation, you can contact Ruby Dinsmore, partner in our employment team.

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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP