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the exercise of discretion in makingbonus payments to employeesLandwell London

The recent case of Clark v Nomura International concerns the sensitive issue of employee bonuses in the financial services sector. Many employers rely on wording in contracts or letters confirming bonuses to establish that payments are entirely discretionary. This case shows that "discretionary" does not always mean what it says.

Mr Clark was a senior equities trader with Nomura. His letter of appointment stated that Nomura operated a discretionary bonus scheme, which was not guaranteed in any way, and which was dependent on his individual performance and on his remaining employed with Nomura on the date of payment. An appendix to this letter referred to the scheme providing "senior equity management with discretionary elements dependent on overall performance and contribution to the business" and described the method of bonus pool calculation.

Nomura decided to dismiss Mr Clark and placed him on garden leave. It determined not to pay him any bonus in respect of his final (partially completed) year of employment, even though he was still in employment (although on garden leave) at the date for payment of the bonus, and had earned substantial profits for the company during that period. Other senior employees, including one whose department made a loss, were awarded substantial bonuses.

The judge held that Nomura was in breach of contract by not awarding Mr Clark a bonus, notwithstanding that his contract and offer letter seemed to provide the employer with the discretion of whether or not to award a bonus. He said that an employer exercising a discretion, which on the face of the contract is unfettered or absolute, will be in breach of contract if no reasonable employer would have exercised the discretion in that way.

Nomura was under an obligation to consider his bonus payment in light of his individual performance. Because of the reference in the documents to individual performance, other factors such as the need to retain and motivate had to be ignored. In the context of securities trading, performance is largely linked to profitability. Therefore, Nomura's decision not to award a bonus to Mr Clark who had earned substantial profits for the company was perverse and irrational, and did not comply with the terms of the employer's discretion.

These issues were reinforced in Chequepoint (UK Ltd) v Radwan where the Court of Appeal said that if an employer agreed to notify an employee of changes to a discretionary scheme, the employee was entitled to the scheme's existing terms until any change was notified.

The cases show that, when putting in place discretionary bonus schemes or awards, employers must consider the following:

  • Any guidelines or criteria relating to the payment of a bonus should be drafted with care. If documentation is intended to provide that a bonus is discretionary, any additional words used should be carefully chosen, as they will set the parameters within which the employer must exercise that discretion.
  • Any changes to a discretionary scheme must be notified promptly to employees.
  • An employee will not be able to be denied a bonus just because he has been placed on garden leave.
  • An employer must observe the terms of its discretion when deciding what bonus to award to an employee. Ignoring relevant factors or bringing in ones which are not applicable, will make the decision on a bonus amount easier to challenge.

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