For many senior executives, the most valuable part of a remuneration package is not salary but bonus.
This raises one of the most common questions we are asked: ‘If I resign will I still receive my bonus?’ Many believe this should be payable if it has been paid every year and because it is in the contract of employment. Unfortunately, it’s not as simple as that.
Whether you will be paid your bonus will depend on the wording of the bonus scheme, whether it a contractual or discretionary bonus (just because it is referred to in the contract does not mean it is contractual), and whether there is a requirement that ‘the employee must remain employed’ on a particular date. The timing of any resignation can therefore have an impact on whether it is payable.
Key Considerations
These will include:
- Is the bonus contractual or discretionary?
- Are there individual, team or business performance conditions?
- Must you still be employed on the determination date?
- Must you still be employed on the payment date?
- Does being under notice affect entitlement?
- Are there clawback provisions?
- Are there ‘good leaver’ and ‘bad leaver’ rules?
The precise wording of the bonus scheme will therefore have a direct impact on whether it is payable.
A bonus described as discretionary is not always beyond challenge, but it will usually be harder to dispute than a clearly contractual entitlement. The facts, wording and history of previous payments will all be relevant considerations.
The Timing Trap
Many executives focus on the size of a bonus but overlook crucial timing requirements. It is common for bonus schemes to require an employee to remain employed on the bonus determination date, the payment date, or both.
Some schemes also exclude payment where an employee is under notice, even if the bonus relates to a period in which they performed strongly. This means that resigning shortly before payment can have unexpected consequences.
All too often, the issue is not whether the executive earned the bonus in a commercial sense. The issue is whether the scheme wording allows the employer not to pay it.
Deferred Bonus Arrangements
In sectors such as banking, private equity, asset management, technology and professional services, deferred compensation arrangements are increasingly common.
It would be essential to carefully review:
- vesting schedules
- deferral periods
- forfeiture provisions
- malus and clawback provisions
- good leaver and bad leaver definitions
- share option or equity plan rules.
In some circumstances, leaving employment can result in the potential loss of significant future payments unless key terms are negotiated in advance.
This is particularly important where deferred awards have built up over several years. A new employment offer may look attractive, but executives are cautioned to consider what potential value is being left behind and time their departure carefully.
Good Leaver and Bad Leaver Provisions
Bonus terms and equity documents often classify ‘leavers’ differently.
A ‘good leaver’ may retain some or all rights. A ‘bad leaver’ may lose unvested awards, deferred compensation or favourable valuation treatment.
The definitions vary. Voluntary resignation, dismissal, redundancy, ill health, retirement, misconduct or negotiated exit may all be treated differently in terms of entitlement depending on the documents.
Before resigning, senior executives should therefore understand not only whether they are entitled to a bonus, but how their exit will be characterised.
Before Handing in Your Notice
Before resigning, it is advisable to consider:
- whether a bonus payment is imminent
- whether the bonus has been determined but not yet paid
- whether and when deferred awards are due to vest
- whether share options may be affected
- whether being under notice changes entitlement
- whether the departure date could impact the financial position
- whether there is scope to negotiate protection as part of the exit.
A small change in timing can sometimes make a substantial financial difference.
Final Thought
Many bonus disputes arise because executives focus on the opportunity ahead, and hand in their notice or agree a departure date without fully understanding the financial consequences of the timing. Attempting to retrospectively to negotiate the position is often futile; early advice, before any final decisions are made, is recommended to optimise financial payments and protect negotiating leverage.
How We Can Help
Quastels’ Employment Team regularly advises senior executives on bonus entitlement, deferred compensation, share options, good leaver and bad leaver provisions, settlement negotiations and remuneration disputes.
