Here is a recent case which contains lessons harder than A-Level Maths for employers with discretionary bonus schemes.

Mr Hills was regional sales manager in the UK for Niksun Inc, a US-owned business whose website says that it is “the primary provider of full packet capture for DISA“.  No, nor me.  Niksun runs a bonus scheme based on attributable sales revenues.  While it stresses repeatedly that revenue allocations are discretionary, it also states that they will be “fair and reasonable” and that for any given sale, the allocation will take into account point of influence (where the major account control resides), point of sale (where purchase orders are received) and point of installation (where the delivered product is physically sited).  Each is allocated up to a third of the available revenue, but all still subject to repeated references to an overriding discretion residing with senior management in the US.

Mr Hills closed a sale in the UK for an installation in Asia Pacific. He had been told by his boss, who had in turn been told by someone senior in the US, that if the deal were done, he would be “looked after” in relation to the revenues coming off it.  He was correspondingly more than slightly disgruntled when credited with less than half (48%) of those fees.

But the scheme was discretionary, it said repeatedly, and everyone knows that so long as a discretionary bonus award is not perverse or irrational, it cannot be challenged. The UK was clearly not the point of installation, so that was a third of the revenues gone elsewhere straight off.  In addition, employees in the US had undoubtedly contributed to some extent to the account management, so that suggested that Mr Hills should not get all the remainder.  In the circumstances it would surely be impossible for him to show that a 48% allocation was irrational or perverse?

Perhaps so in normal circumstances, but the Winchester County Court Judge (now backed in full by the Court of Appeal) took the view that these were not normal circumstances. And therein lie the lessons for employers, since the points which the Judge relied on in awarding Mr Hills a sum equivalent to an allocation of two thirds of the contract revenues (an extra £6,700) are in fact present in many bonus schemes and bonus discussions:

Lessons for employers:

• The very high “perverse or irrational” hurdle for a successful challenge to a discretionary bonus award only applies where the discretion is completely unfettered.

• So as soon as you start qualifying it in any way, you are bound also by those qualifications. Here there were three main caveats to the broad discretion which Niksun thought it had:

• The statement that the bonus would be “fair and reasonable“. This sounds like a modest enough aspiration, but is still a much narrower band than that which is merely not irrational or perverse, a phrase which can easily allow for decisions which are unfair, harsh, ignorant or unreasonable.

• The assessment of revenue allocation by the three points (influence, sale, installation). The Judge found as a fact that the UK, not the US, was the main point of influence.  This necessarily suggested a higher figure for Mr Hills than a calculation based on its being the US.

• Most dangerously for employers, the assurance to Mr Hills’ boss that the UK would be “looked after” in the revenue allocation. Which employer has never said anything of this sort to an employee with itchy feet?  However, even a phrase as vague and non-committal as that was still found to have a weighting effect in the proper exercise of Niksun’s discretion.

• It would be easy to conclude that the Judge reached his conclusions because Niksun did not call as witness the US boss responsible for the bonus allocation. His evidence as to the thinking behind the bonus decision would have gone a long way on Niksun’s behalf.  However, the Judge was no fan of Mr Hill either – “Mr Hills was so strongly motivated to maximise his claim that he had been willing to behave in a dishonourable way and was a witness whose evidence should be treated with caution”.  Mr Hills was therefore in the faintly depressing position of not being fully believed even though the other side effectively did not turn up, but he succeeded all the same.

• So think carefully where you want to put the line between law and good practice for your bonus scheme. Give your employees no insight into how it will be assessed, no assurance that it will be fair and no promise that good work will be rewarded, and you will have very substantial freedom of manoeuvre.  However, if you want your staff to be committed, incentivised and perhaps less likely to make the sort of comments about you which appear on Niksun’s Glassdoor review, there may be a price attached.