What will happen to bonuses?

16 10 2008

In normal times (and heaven knows we are not in them at the moment), people only really get interested in bonuses come January and February each year.  But because of the extraordinary events of the last week or so (I’m thinking particularly of the bail-outs of some of our biggest banks) there has been speculation over what it will mean for next year’s bonus round.  The speculation has been fuelled by comments from the Chancellor of the Exchequer that large bonus payments will not be tolerated at those banks that have been part-nationalised.  The wider media, always in search of an easy scapegoat, has leapt at the chance to have a go on the issue. In turn that has led some lawyers to discuss whether bonuses can be regulated or reduced.

Most people in the financial services sector have an entitlement to be considered for a discretionary bonus each year.  In some cases (such as when an employee has just joined a new company) the bonus may be guaranteed, but in most cases not.  The usual scenario of such schemes is that the employee has no contractual right to receive anything, although there has been some case law over the years on this issue.  

Matters reached a head on this issue in 2006 in the case of Commerzbank v Keen.  That case was about the level of bonus paid to an employee and it was held, by the Court of Appeal, that the burden of proof on the employee in these types of cases was very high because the employee would have to show that the employer’s decision to pay the level of bonus actually awarded was irrational or perverse.  That is a very high hurdle to overcome of course and, in the current climate where everyone in government from the Prime Minister and  Chancellor down is calling for bonus restraint, it is unlikely that a Judge in the High Court would have much sympathy with an employee seeking a much increased bonus, especially if the Bank in question was one of the ones propped up by the tax-payer.

This may well all be academic because most employees are probably just glad to be in work at the moment and won’t be anxious to bring trouble upon their heads by arguing about their annual bonus.  If, as expected, the economy does go into recession, the levels of bonus will be lower in any event, so the prospect of regulation, by the FSA or anyone else, will recede.  Indeed, the FSA through its new Chairman, Adair Turner, has ruled this out. I also can’t see the government legislating to restrict bonuses as this would really smack of the bad old corporatist days of the 1970s.  Nationalisation might be back but is a return to the prices and incomes policies of thirty years ago realistic? I don’t think so.  

This aticle will appear in the Docklands and Peninsula newspaper week commencing 20th October.

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