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?’ After all, you have worked hard up and delivered on some fantastic projects so you should be entitled to it up to that point, right?
Unfortunately, it is 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, and whether ‘the employee must remain employed’ on a particular date.
The timing of resignation can therefore make a substantial financial difference.
Key Questions
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 wording of the scheme can significantly affect entitlement.
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 all matter.
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 for Executives 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 must understand what potential value is being left behind.
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 depending on the documents.
Before resigning, senior executives should 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 will be relevant to consider:
- whether a bonus payment is imminent;
- whether the bonus has been determined but not yet paid;
- whether deferred awards are due to vest;
- whether share options may be affected;
- whether being under notice changes entitlement;
- whether the departure date could impact your 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 without fully understanding the financial consequences of leaving their current role and retrospectively try and negotiate the position. Early advice is essential to optimise current arrangements and timing.
In my experience, the focus should not simply be on ‘I am receiving a higher salary in my new role’ but should include ‘What am I giving up if I resign now?’
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.
Early advice can help identify risk, protect negotiating leverage and avoid costly surprises before resignation is submitted.
