Bonus, LTIP and equity disputes

Discretionary does not mean unreviewable. A discretion has to be exercised rationally, honestly and for a proper purpose — and where it has not been, the decision can be challenged.

"It's discretionary" is the beginning of the argument, not the end

Most bonus schemes describe themselves as discretionary, and most employers treat that word as conclusive. It is not.

Where a contract gives an employer a discretion, the courts imply a limit on how it may be exercised. The discretion must not be exercised irrationally, arbitrarily, capriciously or in bad faith. An employer cannot decide on a whim, on an improper basis, or in a way no reasonable employer would.

What that means in practice. A zero bonus awarded to someone who met every stated objective, in a year the business performed well, while comparable colleagues were paid, is not obviously a rational exercise of discretion. Nor is a decision taken because you had resigned, or raised a grievance, or were about to be made redundant.

The question is not whether the employer had a discretion. It is how it was exercised, on what information, and whether the explanation given stands up.

Where these disputes come from

The bonus that disappeared the month before it vested. Most schemes require you to be employed and not under notice on the payment date. Where the timing of a dismissal or a resignation was engineered to fall before that date, there are arguments available — including that the employer breached the implied term of trust and confidence, or prevented a condition being fulfilled.

Good leaver and bad leaver. The same problem as in shareholdings. The definitions are frequently loose, the financial gap is large, and the category you are assigned is often a decision rather than a fact.

Deferred and unvested awards. LTIPs, share options and restricted stock commonly vest over three or more years, so a departing senior employee may have several tranches outstanding. What happens to them on termination is governed by the plan rules — which are usually longer and more important than the employment contract, and which almost nobody reads before signing a settlement agreement.

Clawback and malus. Increasingly common, particularly in financial services. Whether a clawback provision was validly incorporated, and whether it has been properly applied, is frequently arguable.

Commission. Often the largest part of the package for a salesperson, and often the least clearly documented. Whether commission is payable on sales completing after you leave depends on the scheme’s wording, and the wording is regularly ambiguous.

The point to take away

These claims are at their most valuable before you sign a settlement agreement, and at their weakest afterwards.

A settlement agreement drafted by your employer will typically waive claims relating to bonus and equity in general terms, while carving out nothing in your favour. Once signed, the deferred award you assumed you would keep may be gone, and the argument about which leaver you were has been given away for nothing.

So before you sign anything: read the plan rules, establish what is outstanding, work out what each tranche is worth, and make sure the agreement deals with them explicitly. It is the single most valuable half hour available to a departing senior employee.

What we do

Read the scheme rules, the contract and the plan documents together — they are often inconsistent, and the inconsistency is frequently useful. Assess whether a discretion has been exercised properly. Quantify what is outstanding. Negotiate the treatment of deferred and unvested awards as part of an exit. And bring claims where negotiation does not work.

What it costs

£400 per hour plus VAT with an estimate agreed first. For a review of scheme rules and an assessment of what you are owed, we can usually fix the fee.

Where the sums are substantial these claims are frequently worth pursuing, and we will tell you at the outset whether we think yours is.

Questions

Questions people ask us

My bonus is discretionary. Do I have any claim?

Possibly. A discretion has to be exercised rationally, honestly and for a proper purpose. A zero or reduced award that cannot be rationally explained — particularly against comparable colleagues — is challengeable.

I was dismissed a month before the bonus was paid. Is that lawful?

It depends why. Where timing appears engineered to defeat an entitlement, there are arguments available. The evidence around the timing of the decision is usually what matters.

What happens to my unvested shares if I leave?

It depends on the plan rules and on whether you are treated as a good leaver. Do not assume — read the rules, and make sure any settlement agreement deals with them expressly.

Can they claw back a bonus already paid?

Only if a clawback provision was properly incorporated into your contract and has been correctly applied. Both are worth checking rather than accepting.

Is commission payable on sales that complete after I leave?

Depends on the scheme’s wording, which is frequently ambiguous — and ambiguity is generally construed against the party that drafted it.

The hub

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