Bonuses are a significant but unpredictable part of most bankers’ income. Under the current EU cap, bankers can receive bonuses equal to 100% of their basic salary and with shareholder approval bonuses of 200% can be awarded. However, a banker may receive no bonus at all. Emolument.com, a site that provides bonus statistics based on data submitted directly by professionals, predicted that 2016 would see more ‘doughnuts’ (zero bonuses) at one end of the spectrum and very large strategic pay outs at the other. And, according to a recent article in The Independent online referring to the lack of transparency in the making of bonus awards, a banker may have little insight into what they will receive until it is awarded.
Against this background of uncertainty, how can you work out your finances on separation or divorce if a large part of your income, or your spouse’s income, is a discretionary and difficult to predict bonus?
Past decisions of the Family Court can provide some guidance - the Court will consider relevant previous decisions when addressing questions of financial provision and spousal maintenance on divorce. This blog will look at how bonuses were treated in two previous cases relating to spousal maintenance.
The question of how to deal with bonuses arose in two High Court cases: P v P  EWHC 4105 (Fam) and SS v NS  EWHC 4183 (Fam). In these cases the Court considered maintenance awards to wives whose husbands worked in banking and had historically received significant bonuses. The bonuses had been used, together with the husbands’ salary, to meet the families’ needs. In both cases, the separating husband and wife had cohabited for more than 10 years: 19 years in P v P and 12 years in SS v NS.
In both cases, the Court began by assessing the wife’s basic needs and ordered the husband to make periodical payments from his annual base salary to meet those needs. The Court then assessed what the wife’s generously interpreted needs would be, i.e. what discretionary items in her budget the Court would make provision for if the husband’s income was higher than his base salary, as it historically had been. Both Mrs Justice King in P v P and Mr Justice Mostyn in SS v NS awarded the wife a percentage of the husband’s future estimated bonuses.
In both cases, the estimate of the husband’s future bonuses was based on the pattern of historical payments and information on his prospects and those of his employer. The percentage figure awarded to the wife was broadly calculated to cover the cost of the wife’s additional, discretionary items in a year when the husband’s estimated bonus was achieved.
This approach allowed the Court to recognise that the wife’s ‘basic’ needs did not reflect the parties’ standard of living, which was based on the husband’s salary and bonus, but also that the wife’s generously interpreted needs could only be met if a bonus was awarded. If the husband received a zero bonus, only the wife’s basic needs would be met. Mr Justice Mostyn’s judgment referred to the wife being able to “live satisfactorily” on the periodical payments alone and “comfortably” on the amount she would be awarded in a year where the husband achieved his estimated bonus.
Mrs Justice King and Mr Justice Mostyn both held that the wife’s percentage bonus award needed to be capped. Mrs Justice King decided that “the setting of a cap is essential in order to avoid the unintentional unfairness which may arise as a consequence of a wholly unanticipated substantial bonus” paid to the husband. If there was no cap on a wife’s percentage award, the wife could receive a windfall in excess of the discretionary needs which inform the award. In the words of Mr Justice Mostyn, the husband should be entitled to retain a significant part of a bonus that he has had to “work exceptionally hard” for.
The cap in each case broadly reflected the amount needed to meet the wife’s discretionary needs but both judges emphasised that such orders “cannot be calculated with arithmetical precision”. The Court would consider the overall proportion of the available income being used to support the wife as well as the detail of parties’ budgets. In short, and as expressed by Mr Justice Mostyn, the Court would survey the wood as well as the trees.
Term of maintenance
In SS v NS, the periodical payments intended to meet the wife’s basic needs were ordered for a longer term than the wife’s percentage bonus share. The periodical payments were to continue for an extendable 11 year term whilst the wife’s percentage share was to continue for a non-extendable 7 year term. Mr Justice Mostyn said that the bonus share should be non-extendable because he did “not consider that it would be just for the wife to be capable of sharing in the husband’s bonus after 2021”.
In P v P, in contrast to SS v NS, the wife was older (55 years old as against 39 years old) and did not have any clear plans to re-train and earn her own salary. In that case, the wife was awarded both the periodical payments and the bonus share on a joint lives basis (i.e. maintenance with no term).
Treatment of deferred cash or shares
Most bonuses are made up of various elements and can include deferred cash or shares, which will be paid out at some point in the future. Some payments will be dependent on continuing employment. In both cases referred to in this blog, the wife shared in both the immediate cash and the deferred elements of the husband’s bonus. Mrs Justice King decided in P v P that the wife’s percentage share of the bonus “will apply pro rata across the various elements – it would not be fair for her to be entitled to receive the entirety of her maintenance percentage from the cash element leaving the [husband] to take the risk on stock movements and the cash flow consequences of deferred cash payments”.
Whilst the court may award a greater share of the parties’ liquid capital assets at the time of separation to one spouse, it is unlikely that one party will be awarded exclusively the cash element of future bonuses whilst the other party is forced to take the risk of deferred elements (assuming there is risk involved).
How might these cases impact you?
If your family’s income has historically been derived from a base salary and a significant bonus, the Court will consider whether an order for a percentage share of future bonuses is appropriate and necessary to meet needs. The Court will consider your basic and discretionary needs and will look at the history of earnings as an indication of what will be received in the future. If a percentage share of future bonuses is awarded, the amount and term of such an award will depend on a number of factors, including the age of the parties, the time since separation, the standard of living during the marriage and the length of the relationship. Regardless of the percentage share awarded, P v Pand SS v NS offer clear guidance on the Court’s tendency to cap such awards and for the parties to share the risks associated with bonuses.