Pay decision-making facing added scrutiny in absence of UK bankers’ bonus cap

Has the lifting of the cap on bankers bonuses increased the risk of pay disputes?

The cap was lifted on 31 October last year, allowing firms in the FS sector greater flexibility to reward staff and pay them bigger bonuses. It has been widely seen as a helpful development enabling firms to attract and retain top talent but could it lead to a rise in disputes over bonus pay? We’ll consider that risk and how to minimise it.

A reminder. The bonus cap was introduced in 2014 to deter excessive risk-taking by more closely aligning reward with risk. It proved to be unpopular with the investment banking sector, and in particular with US and Asian investment banks operating in London, who found themselves unable to align London pay practices with those in other global centres. The PRA and FCA recognised that issue and agreed to lift the cap with effect from 31 October last year. It  means firms are now able to pay bonuses exceeding 100% of fixed pay, or 200% 
with shareholder approval. 

The change means firms are better placed to reward their staff and so attract and retain talent by paying higher bonuses. However, with that comes increased scrutiny of the decision-making process. So, executives may have heightened expectations about potential bonuses so if they perceive the process to be unfair or lacking in transparency it could lead to an increase in disputes over bonus pay. 
Aside from the issue of the lifting of the bankers’ bonus cap specifically, over the past couple of years we have noticed a steady rise in the number of disputes around discretionary bonus schemes more generally which we have highlighted previously in this programme. That trend led us to develop a product designed to help firms identify the risk of disputes arising and address them before they turn into a full-blown pay disputes and, given the heightened risk for the banking sector with the lifting of the cap, it's a good time to look again at the product. Chris Evans has been involved in its development and earlier he joined me by phone from the London office to discuss it: 

Chris Evans: “So what we've developed is a product which takes an employer's bonus scheme and asks a number of pertinent questions about how they implement that bonus scheme to identify whether there are any kind of red flag risks that they ought to be addressing now. So what we often see with bonus schemes is that they either very historic or haven't been looked out for a while and most years there isn't a problem because it's a very good thing the staff are given bonuses but in circumstances where there either are bonuses not being paid out, or bonuses are less than employees expect, that's very often where we see the challenge and what we're looking to do is to pre-empt those challenges by ensuring that employer’s bonus schemes, and the processes they follow through to implement them, are fit for purpose and they're going to send the best possible chance of defending any such claim if one arises.”

Joe Glavina: “I talked recently to the share plans team about this and the problems they sometimes see around discretionary bonuses when people didn’t get the pay-outs they were expecting. It can be very costly for the employer if they’ve got it wrong.”

Chris Evans: “Absolutely, so the costs of getting the bonus scheme wrong, or the implementation wrong, can be extremely high for an employer. One example is a case I did relatively recently was there was a dispute with an employee who was exiting as to the amount of the bonus and the bonus schemes rules were drafted in such a way that there was a level of ambiguity. The ambiguity meant that this individual was able to come to a figure which exceeded a million pounds whereas on our interpretation of the bonus scheme it was far less, around the £100,000 mark. So you could end up in a situation because of the value of the claim, particularly that claim, where you could end up in the High Court and the legal fees alone associated with that would run into the tens, if not hundreds of thousands of pounds. So what we are looking to do here is try and ensure that the bonus scheme is fit for purpose so that when you are presented with a challenge like that you can clearly turn around and say no, the bonus rules are clear, there's an element of discretion here, yes, but we're not acting irrationally when exercising that discretion.”

Joe Glavina: “I can imagine some managers struggling with that. So they might see a decision not to pay a bonus, or to pay a lesser amount, as perfectly rational, but the employee, and perhaps ultimately a court, might see it differently. What’s your message to HR on handling that?” 

Chris Evans: “Yes, I think what is a helpful takeaway for employers is that if you are paying some bonus, and there's an element of true discretion if I can put it that way, so you're not fettered by the contract as to what you can and can't take into account, and you apply the appropriate categories as part of your discretion, as part of your decision making, then a court should be reticent to interfere and there is good case law authority which goes to that. The difficulty, however, which I say is that you very often have ancillary claims associated with a bonus dispute. So there may be a discrimination claim or there may be a whistleblowing complaint, for example, and what we typically see is that an individual will claim that the manager who made the decision about the bonus has subjected them to some form of discriminatory treatment, for example, and that give rise to a significant concern because if they are the ones making that decision, and if there is a finding of discrimination, a court would be quite alive to the fact that actually any discretion which has been exercised could be irrational in circumstances where the decision maker is found to be discriminatory. Now, this is always why I recommend there to be at least a review process as part of a bonus decision making exercise. So even if the manager identifies what bonus they think it's appropriate they should document why, first of all, so we've got an audit trail, but that needs to be independently audited by another manager. So at least then if we get into a dispute we can say, well, yes you may have a complaint against your manager for discrimination, or for whistleblowing detriment or whatever it may be, but the exercise of discretion around the bonus has been independently verified and the second manager has not been tainted, even on your own account, by this alleged discrimination. So again, it just gives us more ammunition to go into litigation, if indeed it arises, so that we can properly defend these claims.”

On the subject of bonuses, our team has also been warning firms in the FS sector of the need to take steps to ensure that their bonus policies do not contribute to the gender pay gap which is already wider in financial services than most other sectors. In ‘Financial services gender pay gap must not be exacerbated by bonus policies’ they explain how the  lifting of the bonus cap presents a risk to further progress. We’ve put a link to that article in the transcript of this programme.

LINKS
- Link to Out-Law article: ‘Financial services gender pay gap must not be exacerbated by bonus policies’