Discretionary bonuses vs calculable ones

For years, I have said that there are two types of bonuses: discretionary or objectively calculated. Many employers use mixed wording which leads to ambiguity, and we know that any ambiguity in a contract will be interpreted contrary to the interests of the drafting party.

Examples of confusing wording I have seen are

You will be entitled to a discretionary bonus calculated based on company and individual performance.

Your annual bonus is targeted at 10% of salary, to be determined based on the performance of the company, your department, and yourself. All bonus payments are entirely at the discretion of the company.

You will receive a discretionary annual bonus, calculated ½ based on company performance and ½ on your performance, in accordance with the factors attached at Schedule A which will be updated annually. You agree that this bonus is entirely discretionary and the company has full discretion to determine if you receive any bonus and how much is paid out.

As I always say, it cannot be discretionary and based on an objective calculation; bonuses should be one or the other. When working with employers, I usually recommend that bonuses be entirely discretionary because in that case

Discretion is not unlimited

However, a recent decision of the Ontario Court of Appeal has confirmed that even purely discretionary bonuses come with limits, and that employers are required to exercise that discretion reasonably and in good faith.

In Bowen v. JC Clark Ltd., the employees in question were Portfolio Managers for a hedge fund. Their contracts all contained this bonus clause:

At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.

So the clause gave the Company “total discretion”, said that the employees “may be eligible for a bonus”, and that eligibility depending on factors including personal performance and Company profitability.

As the revenue and profitability of the Company grew, the employees in question began pushing for substantial bonuses. When the issue could not be resolved, they ended up in litigation. The bonus issue was not addressed directly by the Trial Judge, who found that it was not adequately pleaded. However, the Court of Appeal disagreed and rendered a decision on that issue.

The Court of Appeal was clear in finding that discretion is not unfettered in this context:

I do not accept the respondent’s position that the discretionary nature of the bonus provision in paragraph 5 of the employment agreements means that the employer was entirely unconstrained as to how that discretion was exercised. Where an employment agreement provides for a discretionary bonus, there is an implied term that the discretion will be exercised in a fair and reasonable manner.

Interestingly, the Court went on to determine how much the bonuses should be. First, they summarized the evidence of the Company regarding how they determined bonus entitlement:

The evidence of the representatives of the respondent at trial, in particular Stewart (but to some extent also Doherty), was that Stewart and Doherty met in December of each year to consider the allocation of discretionary bonuses from a pool of funds set aside for that purpose. They considered a variety of factors, including corporate performance, individual performance, attitude, teamwork, and how individuals were performing in their roles. To some extent, the allocation of bonuses also took into account factors including how long individuals had been at the firm, their seniority, and their position within the company. The allocation of bonuses to employees was, as Stewart phrased it, “purely subjective”; the allocation was discretionary, and no calculations were involved. I note that, to the extent that this evidence asserted an unconstrained discretion on the respondent with respect to awarding bonuses, it is inconsistent with the obligation to exercise that discretion in a fair and reasonable manner. In cross-examination, Stewart agreed that considerations such as fund performance in a given year, raising assets for a fund, and marketing a fund would also be factored into assessing the amount of a discretionary bonus.

The Court then considered which other employees were appropriate comparables and determined how much the plaintiffs should receive.

Pith and substance

On a whim, I Googled “discretionary” and found that according to the Cambridge Dictionary:

The dictionary went to provide these examples (with my emphasis):

The Bowen decision is not surprising in light of the legal trend toward a requirement that parties act in good faith in the performance of commercial contracts as confirmed by the Supreme Court of Canada in Bhasin v. Hrynew.

Employers and counsel need to be mindful of the fact that based on Bowen, employers cannot arbitrarily choose not to award a bonus, or to award a nominal one, even when the bonus is at their “total discretion”.