What can Senior Executives do when their Discretionary Pay has been Reduced or Withheld?

We recently published a news alert highlighting Five Common Questions from Senior Executives in the Current Climate, one of which was “What can Senior Executives do when their Discretionary Pay has been Reduced or Withheld?”

Whilst the exercise of discretion is, by its nature, a difficult issue to challenge, recent case law has provided helpful guidance on the limits of such an exercise. In this alert, we consider the implications of these recent developments and look at what strategic steps a senior executive who has been denied a discretionary payment can take.

Many senior executives have remuneration provisions which stipulate that a portion of their remuneration, such as their bonus, is discretionary. In the current climate, many executives are finding that this provision is being exercised to their disadvantage. In circumstances where discretionary payments often account for the substantial portion of a senior executive’s overall remuneration, and where the discretion has regularly been exercised in their favour in the past, many executives may not appreciate the level of discretion that their employer actually retains.

Labelling a bonus or incentive scheme as “discretionary” is not, of itself, definitive. For example, depending on the drafting of the relevant provision, the employer may be fettered in their discretion as to whether to award a bonus, but could retain discretion over the amount of the bonus to award. However, where a provision has been carefully drafted so as to allow an employer wide discretion, it will generally be difficult for an employee to challenge the exercise of that discretion.

Recent case law, including Braganza v BP Shipping Limited, has provided some additional guidance regarding such exercise, namely that a discretion cannot be exercised in a manner which is arbitrary, capricious or irrational. Further, an employer must not take into account irrelevant factors or fail to take into account relevant factors. In the Braganza case, an engineer working on an oil tanker disappeared one evening. His employer conducted an investigation and concluded that Mr Braganza had committed suicide, thereby depriving his widow of the entitlement to certain death benefits. The Supreme Court determined that, while the employer’s decision had not been “arbitrary, capricious or perverse”, nonetheless, it was unreasonable on the basis that relevant factors had not been taken into account.

Although some commentators view the Braganza decision as heralding a new interventionist approach by the courts, many others think that the Supreme Court’s ruling may have been influenced by the uniquely tragic circumstances of that case, and it is notable that it does not yet appear to have opened the floodgates to challenges of the exercise of discretion.

A senior executive may suspect that their discretionary pay has been reduced or withheld for unreasonable or discriminatory reasons. Long before litigation is contemplated, there are steps senior executives can take to gain information relevant to a potential challenge, both under the Equality Act 2010 if discriminatory pay practices are suspected and by use of the Data Protection legislation, including data subject access requests.

As a result, we have found that executives may now have increased leverage when internally challenging what appears to be an unfair exercise of discretion. Given the potential value of a senior executive’s discretionary payments, it is unsurprising that most will not be prepared to allow what they view as an abuse of their employer’s discretion to go unchallenged.

Our firm has extensive experience in advising senior executives on what actions they can take if their discretionary pay has been reduced or withheld. If you would like to discuss any of these issues further, or for guidance on your specific rights, responsibilities and potential liabilities, please contact David Fisher (Partner), who specialises in employment and partnership law issues for multi-national employers, senior executives, firms and partners.