A group of former Dresdner Kleinwort bankers recently established the right in the High Court to a share of a bonus pool of €400 million. Few employers have such largesse to distribute, but the case highlights some important points about discretionary bonuses:
- announcing a minimum or guaranteed bonus pool can create a contractual obligation to distribute it;
- even if each individual employee’s award from the pool is discretionary and subject to their personal performance, the employer is obliged to exercise its discretion in a bona fide and rational manner;
- attempting to attach conditions to the bonus after announcing the bonus pool, or after informing individual employees of their bonus award, will be a breach of the implied term of trust and confidence if the purpose behind the conditions is to allow the employer to avoid paying all or some of the bonus – a condition that makes the bonus subject to the overall performance of the employer is likely to fall into this category; and
- even if conditions are clearly set out in advance, the employer must apply them properly and in good faith.
The facts of the case were unusual, arising as they did during the banking sector near-collapse of 2007-2008. However, recommendations for employers in relation to discretionary bonuses are as follows:
- set out bonus conditions clearly in advance;
- avoid announcing minimum or guaranteed bonus pools;
- if you have to, e.g. for retention purposes, ensure that the announcement sets out any conditionality that will apply to distribution of the pool or payment of individual awards, or at least the possibility of conditions being imposed later.