Employers with responsibility for exercising discretion over employee bonus payments must do so rationally, the High Court has confirmed in a case brought against an investment bank.
In Brogden v Investec Bank, the dispute came down to the bonus clause contained in both of the claimants’ contracts. The claimants, both equity derivative dealers, had contracts that provided for an annual bonus, calculated as a percentage of the value added to the business.
After three years of dispute over the amount of bonus awarded, which were resolved amicably, for the year 2010/2011 the bank calculated an available bonus pool of zero which the claimants disputed stating they should have been paid bonuses amounting to millions of pounds.
The bank countered that the bonus calculation was based on a formula contained within an express clause of the employment contract, therefore any obligation for the bank to act rationally when awarding the bonus was removed.
Outcome
The High Court disagreed with the bank’s argument, stating that the employer’s decision is final and binding on the employee where the employer has responsibility to assess or judge an issue which materially affects the payment of a bonus, and there is scope for divergence of views, although the usual safeguards governing the exercise of discretion apply.
Although the bank lost the argument on the way it had exercised its discretion, the court found in favour of the employer in concluding that its calculation for the bonus pool was fair.
In summary
Employers will find merit in a properly drafted bonus clause which sets out the calculations to be applied. There will often be an element of judgment in practice however. Always assume that the decision making process will be subject to challenge, therefore ensure the clause stands up to scrutiny on objective grounds, exercising discretion in good faith.
