What issues should employers bear in mind?
The bonus has long been considered an essential motivator in the City, so recent reports that star fund manager Neil Woodford is to scrap bonuses at his new firm, replacing them with an increased basic salary and long-term share incentives, have caused surprise. At first sight this appears to be counter-cultural behaviour, but when someone as well-respected as Woodford states that bonuses have little correlation with performance, the proposition has to be taken seriously.
Many have argued that disasters such as Nick Leeson’s single-handed destruction of Barings, or the more recent banking crisis, could have been avoided by remuneration policies which moved the emphasis away from short-termism and risk taking. For a fund manager, encouraging a longer -term view is always going to be more attractive to investors, and the move away from bonuses is consistent with the regulatory regime in the banking sector where bonuses have been forcibly cut back.
Paying part of an employee’s remuneration as a bonus is attractive to employers that wish to hedge against their payroll overhead in a poor year; bonuses are only payable if surplus profits have been generated, whereas basic salary cannot be clawed back. In Woodford’s case, bonuses have to some extent been replaced by a different form of flexible incentive in the form of share incentives, which have the added advantage for the employer that they have an impact on shareholder value rather than on profits.
Pay will always be a sensitive issue and bonus expectations can be considerable, so any change in this area habitually requires careful preparation, sound legal advice and a sensitive approach to the employee relations issues. It is one thing to recruit staff on terms which do not contain a bonus – here the only issue is whether this will deter recruits – but removing bonus provisions from existing staff can be more awkward. There is little difficulty if staff are agreeable to the change, but an employer may be bound to the bonus arrangements if they are contractual. Even where a bonus scheme is non-contractual or discretionary, changes to it may still involve a breach of an implied term in the employment contract regarding the exercise of a discretion, or it could be a breach of the implied term of mutual trust and confidence.
Consequently, employers are often advised to deal with any proposed changes through consultation with employees. If agreement cannot be reached, changes can be imposed with greater certainty if an employer terminates employment and makes an offer of continued employment employment on the revised terms to the employees affected on the revised terms. The employer would have to give employees notice of such a change, and the termination will amount to an unfair dismissal if a tribunal is not satisfied that the employer had sound business reasons for the change and acted reasonably in the way in which it tried to bring those changes about.
Such a process should not be undertaken lightly, however, as it can obviously have a detrimental effect on staff morale and lead to the loss of disaffected employees. It should not be made without a careful analysis of the status of the bonus scheme which is to be removed.
Arguably, scrapping or scaling back bonuses in favour of increased basic pay should operate in favour of female employees. Recent research suggests that women working in the financial services sector receive bonuses up to 50 per cent lower than their male colleagues. This disparity can be difficult for women to challenge as the calculation and payment of bonuses is often an opaque process. Increasing the amount of fixed pay as opposed to variable pay may help to promote consistency and transparency.
New mandatory gender pay gap reporting measures are to be introduced in October 2016, which will require employers to publish details of the average percentage bonus paid to men and women along with details of the overall percentages of men and women that receive a bonus. This will bring variable remuneration further out into the open, so removing any disparities by ending a bonus scheme now is timely.
Michael Ryley is a partner at Weightmans LLP
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