Deutsche Bank bonus cuts: lessons for SMEs

Employment Legislation | Legal | Small Business

By Trent Hancock

Deutsche Bank of Germany recently decided to cut bonuses for local employees as it struggles to turn a profit in the wake of a large litigation bill.

The litigation issue stems from the mortgage market collapse in the lead up to the 2008 Global Financial Crisis, resulting in a $7.2 billion-dollar settlement with the US Justice Department.

The UK Telegraph reported Deutsche Bank is trying to avoid a mass staff exodus by offering long-term incentives, which will be deferred for up to six years. Those affected initially will lose their individual bonuses but will be entitled to group bonuses dependant on the bank’s performance.

The reported bonus cuts have made headlines in publications worldwide, and the actions taken by Deutsche Bank raise questions around the obligation of Australia’s SMEs to pay bonuses.

What should employers be aware of?

Bonus payments are usually governed by the terms of an individual employment contract or an ancillary incentive scheme. Most contracts or incentive schemes will make the payment of any bonus subject to the overriding discretion of the employer.  This discretion is usually expressed as being absolute or unfettered and is often relied upon by employers to withhold the payment of a bonus.

However, courts have shown a preparedness to restrict employers from exercising their discretion in a way that is capricious or arbitrary, even in circumstances where the terms of the contract provide that the discretion is unfettered.

For example, if a particular target is set by the employer and then achieved by the employee, a court may determine that any subsequent attempt by the employer to withhold payment of the bonus is capricious or arbitrary and in breach of the terms of the employment contract. Similarly, if an employee achieves the agreed targets and the employer then purports to exercise a discretion to amend the amount of the resulting bonus, a court will likely deem such an act as capricious.

Accordingly, any discretion retained by an employer will only usually extend to the decision of whether or not to allow the employee to participate in the bonus or incentive scheme and the method of calculation for the bonus amount. Once the decision is made to extend this offer to the employee, and once he or she achieves the targets that formed part of this offer, the offer is ordinarily not capable of revocation and the terms are not capable of amendment.

In the case of Deutsche Bank, if the employer set targets for the bank employees which were in fact met, denying payment could constitute a breach of the terms of their employment contracts. On the other hand, if the bonuses were solely reliant on the bank’s performance, and this was agreed to by the employees, then the bank may have had grounds to refuse payment of the bonuses.

If you have incentivised your employees with bonuses, there a few points to keep in mind.

  1. Be sure to include clear terms relating to all bonuses, incentives or commission payments in the employee’s contract. By doing so, the terms of the agreement will have been established and documented from the outset.
  2. Always identify the nature of the incentive that is being offered. An incentive can take many forms such as a bonus (where discretion is customary) or a commission (where discretion is not customary).
  3. If the offer of an incentive is going to be subject to some form of discretion, explain why and how this discretion will be exercised up front.

In conclusion, bonus entitlements can be considered somewhat of a grey area in employment law and usually depend on the terms of the employment contract.

If you’re unsure how to incorporate incentive plans into your workplace, we recommend you seek legal advice.

About the author

Trent Hancock is a senior associate with McDonald Murholme, an employment law firm based in Melbourne and Adelaide.

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