Discretionary bonuses

A High Court decision this week has confirmed that where bonuses are to be discretionary an employer must exercise that discretion without irrationality or perversity. A failure to exercise a discretion rationally is a breach of contract.

In the case of Clark v Nomura International plc, Mr Clark's letter of appointment provided a discretionary bonus which was not guaranteed in any way and was dependent upon individual performance. In his first year of employment Mr Clark, a senior trader, made substantial profits and received a substantial bonus. He was dismissed in February 1997 and Nomura decided to pay him a nil bonus for 1996/97 even though he had again made substantial profits for them.

The Court concluded that although a lawful exercise of a discretion could lead to a nil award that discretion had to be exercised without irrationality or perversity. In this case the bonus was simply dependent on Mr Clark's individual performance of his contract. The most important aspect of Mr Clark's performance was his profitability. The award of the bonus should have been based on this (and not on the factors which led to his dismissal) and in the circumstances Mr Clark was entitled to substantial damages for breach of contract.

This case reminds employers that a bonus which is discretionary does not give the employer a totally free hand to award whatever bonus he wants (if any). A proper reasoned judgment must be made in the true spirit of the relationship. If low or nil awards are made then these must be justified.

If you require any advice or assistance in drafting or exercising bonus schemes, please contact Simon Jeffreys on +44 (0)20 7367 3000 or by e-mail at [email protected].