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Bonus guidelines essential in event of misconduct

Published on Saturday, 19 Aug 2017

Despite much bad press since the global financial crisis, major institutions are still dishing out huge bonuses and incentives. As there are signs the US government wants to ease restrictions on senior executive pay, particularly in the banking sector, some international bodies are recommending policies, tools and procedures to reduce the risk of misconduct.

To ensure consistency, fairness and transparency in awarding variable remuneration, effective policies should be put in place to determine when bonuses and other incentive-based compensation should be withdrawn, reduced or even clawed back after it has been awarded. Expectations regarding unacceptable behaviour and the impact of any misconduct on remuneration should also be clearly communicated. Failing this, disputes will invariably arise, as shown in two recent cases.

One of these was a court case in Hong Kong, in which an employee’s bonus was struck down by the High Court for want of “legal consideration”, as the bonus was considered “ too good to be true”.

The individual was employed as a senior compliance manager, specifically to help the company with its initial public offering (IPO). On October 19, 2015, five months after starting work, an addendum was made to her employment contract.

The addendum provided that the employee would be given a cash bonus of HK$350,000 under two conditions: if the IPO plan ceased or she resigned before December 31, 2016. The employee left the company two months after the addendum and initiated a claim in the Labour Tribunal for payment of the bonus. The tribunal allowed the claim, holding the addendum was valid. The company then appealed against the tribunal’s decision.

The High Court ruled in favour of the employer on the basis that the addendum was unenforceable for lack of consideration.

It was entered into after the employee started work and merely included two conditions for granting the cash bonus without other changes to the terms of her employment contract. The Court accepted the finding that the company was coerced into signing the agreement, noting there had been an “intimate” relationship between the director and the employee.

Most bonus agreements reward the employee for their work. Here, the agreement seemed to encourage the employee to do a bad job or to resign. While this decision is fact-specific, employers should carefully consider bonus payment parameters to ensure the objectives of introducing a bonus into employment arrangements are achieved.

 In the other case, the Equal Opportunities Commission (EOC) won an appeal against a Labour Tribunal ruling which required it to pay a former employee a gratuity of HK$867,000 following the expiry of his contract.

The employee, the EOC’s chief equal opportunities officer, had lobbied churchgoers to object to the EOC’s proposals to expand discrimination protection for same-sex couples. He did so in his spare time and aired his views on particular equality and marital status issues.

The EOC found his action unacceptable and decided not to pay his end of contract gratuity on the basis that he did not satisfactorily complete his contract. The employee took his case to the Labour Tribunal.

Initially, the tribunal ruled in favour of the employee and decided that the end of contract gratuity was automatically payable at the end of the term and that the EOC could not take into account the employee’s personal activities in determining whether his contract was “satisfactorily completed”.

The High Court found that the tribunal had taken too narrow a view of the words “satisfactory completion” and that, by reference to other terms in the contract, payment was subject to the employer’s discretion, which could take into account conflicts between his work and outside activities.

Although the case would seem to suggest that the employer has wide discretion in withholding payment of a gratuity, the courts will likely examine the exercise of discretion closely.

Prudent compensation design and decision-making are essential to address misconduct risks. This involves sound governance, a robust risk management framework, and adequate control functions.

The board of directors should ultimately oversee its senior management in ensuring that a company has in place a sound compensation system to promote ethical behaviour in compliance with laws, regulations and the company’s own internal control standards.

To minimise disputes, expectations regarding what would constitute unacceptable behaviour should be clearly communicated to employees.

 


This article appeared in the Classified Post print edition as Bonus guidelines essential in event of misconduct.

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