In Humphreys v Norilsk Nickel International (UK) Ltd, the High Court has held that an employer did not act irrationally in determining that no bonus was due under a discretionary performance bonus scheme.

Dr Humphreys was employed as chief economist for Norilsk Nickel International (UK) Ltd under a one-year fixed-term contract. Under the terms of that contract, he was entitled to a discretionary performance bonus for "satisfactory performance". As part of his duties, Dr Humphreys was obliged to forecast the price of nickel. However, in the last quarter of 2008, his forecast was more than 50% off the actual price. Relying on this in particular, Norilsk assessed his performance as unsatisfactory and graded him at level one on a scale of one to six. As a result, no bonus was payable.

Dr Humphreys disagreed. He had been graded at level four or five in each of the previous three years when he had been working in the same role for a group company. He considered that his performance had continued to be satisfactory and that his performance should be graded at level five and a bonus of £572,000 paid. He claimed that the inaccuracy of his forecast was due to the global economic crisis and pointed out that other leading economists had made similar predictions.

The High Court however, held in favour of Norilsk. In this context "satisfactory" meant "sufficiently satisfactory to justify a bonus", not merely carrying out the tasks of his employment adequately and failing to draw criticism. As there had been no agreed objectives, there was no basis upon which an objective assessment could be made. Dr Humphreys' performance could only be judged subjectively. In reaching its decision, the court held that the key question was not whether Dr Humphreys' performance justified a bonus payment but, rather, whether it was irrational of Norilsk to determine that no bonus was payable at all.

On the evidence, the Court found the forecasting duty to be an important one. Given the inaccuracy of Dr Humphreys' forecasting and the fact that this had contributed to Norilsk suffering significant loss, the decision not to award a bonus could not be said to be irrational.

Impact on employers

This case helpfully reaffirms from the employer's perspective that the underlying obligation in determining a discretionary bonus is to act rationally and not arbitrarily. If it does so, it will be difficult for its decision to be challenged.