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Bonus awards – The contract and discretion

Bonus awards – The contract and discretion

The Court of Appeal decided a high value bonus case in recent days that, notwithstanding that the employees were unsuccessful, reinforces the need for employers to draft bonus clauses very clearly, especially provisions setting out how a bonus award will be calculated.

In this case, two bankers, Messrs Brogden and Reid, sued Investec for compensation after they were awarded zero bonuses. The facts of the case are relatively complex and fact sensitive. In summary:

  • The individuals were equity derivatives dealers working for Investec. Following significant guaranteed bonuses in their first year of employment, they were entitled to receive bonuses calculated as a set percentage of the EVA (Economic Value Added) generated by the Equity Derivative business (the ”Business”). Investec calculated the EVA through an automated process, linked to the profit/loss for the Business and other business areas within the bank.
  • Rather than trading with other financial institutions in financial products linked to the equity markets as was originally envisaged, by the beginning of 2008 the individuals had devised new equity-based financial products (akin to investment bonds) suitable for being offered to the retail investment market though independent financial advisers. The products were a success and raised significant sums of money, which were available to Investec as a source of funding to use in other business areas.
  • Importantly, Investec’s Central Treasury department applied a notional interest rate for the benefit of the Business on the amounts raised from the Business’ products. In practice this meant that the overall profit for Investec was divided between the Business and other business centres within Investec, even though the business was generated by the Business.
  • For 2010/11, based on the way Investec calculated profit and loss, the Business made a loss, which resulted in the individuals receiving no bonus. The individuals disputed the bank's calculation methodology and issued a multi-million pound claim. In particular, they argued that the EVA should be calculated by reference to the wider value that their work brought to Investec (through making funds available to other units which might otherwise have come at a greater overall cost to the bank) rather than just the direct value to the Business.

The individuals appealed. The Court of Appeal also decided in favour of Investec, but importantly on different grounds to the High Court. The Court of Appeal did not agree with the High Court that the issue was Investec’s discretion and how this was exercised. Instead, the Court of Appeal decided that this was simply a case of interpreting the bonus provisions in the individuals’ employment contracts and deciding if Investec had acted in accordance with those provisions. The High Court had made important findings of fact about how the contracts were constructed and how the EVA was to be calculated. Based on those findings (which the Court of Appeal did not interfere with), Investec had calculated the EVA correctly and, therefore, no bonus was payable to the individuals. In such a scenario, the question of whether discretion had been exercised fairly or not was irrelevant.

The case itself is fact sensitive. However, it demonstrates that the first area of focus will always be the contract between employer and employee and serves as a reminder of the need to draft remuneration provisions clearly and unambiguously to avoid expensive and time-consuming litigation.