The High Court has confirmed that an employer who is responsible for exercising discretion over bonus payments must do so rationally. It should adopt the customary mantras of 'good faith, proper purpose, [and not be] arbitrary or capricious' even if an express contractual bonus scheme might suggest otherwise.
Behind the million pound headlines of the well-publicised 'bankers bonus' case of Brogden and another v Investec Bank plc EWHC 2785 is a detailed examination of the key issue. The bank argued that an express (but loosely drafted) bonus clause removed any obligation to act rationally or apply its thoughts to the exercise of discretion because it said there was a contractual formula for calculating the bonus pool.
The court disagreed identifying that where:
- the employer has responsibility to assess or judge an issue which materially affects the payment, and
- there is scope for a divergence of views, and
- the employer’s decision is final and binding on the employee;
then the usual safeguards governing the exercise of discretion apply.
Despite losing the argument on the exercise of discretion, the court found in favour of the bank in concluding that its calculated bonus pool was fair!
A well drafted bonus clause which sets out the calculations to be applied will always help employers, particularly in a case like this where the application of certain assumptions was never properly recorded. In practice though there is always likely to be some element of judgment. Employers should assume that the decision making process will be subject to challenge and ensure that it stands up to scrutiny on objective grounds.