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Bonus, incentive payments and commissions
Bankers’ bonuses are a controversial topic in the current economic climate, but can a bank reduce them in the face of public disapproval?
In the case of Attrill and ors v Dresdner Kleinwort Limited and Commerzbank AG  EWHC 1189 (QB) the High Court held in favour of over 100 investment bankers in a group action relating to the substantial reduction of a guaranteed bonus pool.
In 2008 the bank was going through a difficult period and negotiating a sale as a going concern. Uncertainty lead to a high number of bankers leaving (which in turn led to the FSA putting the bank on its watch list) the bank announced at a staff meeting (transmitted live over the intranet) a guaranteed minimum bonus pool of 400 million euros for the 2008 bonus round, which would be awarded to individuals in the normal discretionary manner. The bank was sold, and the new owners decided not to honour this commitment – partly due to poor performance and partly because of the anticipated public reaction after the bank had received substantial funding from the German government.
In December 2008 the bankers were each sent notification of their individual bonus awards. The letter said that the bonuses were subject to a “material adverse change” clause, although it was said that it was unlikely that the bank would rely on this clause. However, subsequently that clause was invoked to reduce the pool of money out of which bonuses would be paid. The bank’s view was that there was no contractual obligation to stand by the announced bonus pool, and the promise was binding in honour only.
The bankers’ sued, and the High Court held that the bonus pool guarantee was a promise that gave rise to a contractual obligation because:
- There was an intention to create legal relations – otherwise the goal of retaining staff and reassuring the FSA would not have been satisfied.
- The promise was “sufficiently certain” i.e. clear and unambiguous;
- As such there was a valid variation of the terms of the bankers’ employment contracts, or alternatively a valid offer that was accepted for consideration which meant that a new contract was created;
- The late inclusion of a “material adverse change” clause was a breach of the implied term of trust and confidence and that the requirements of this clause had not been met in any event, so that the bank could not have relied on the clause anyway.
Points to Note
The case highlights the limitations placed on employers in exercising their discretion in cases where contractual bonus arrangements are not the subject of written procedures. Employers who operate a bonus system should therefore consider putting clear contractual provisions in place which regulates the way in which a discretion to pay any bonuses is exercised, and makes contractual provision at the outset for payments to be reduced or not paid at all either in given circumstances.
Employers should however always be aware that any discretion should be exercised reasonably and not capriciously.
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