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How much discretion does an employer really have when deciding the level of a bonus?

A derivatives trader’s contract of employment stated he was entitled to be considered for a discretionary bonus. The factors to be used when determining the level of bonus, such as the bank’s overall performance and his individual contribution, were described in his contract and in the staff handbook. Both gave the employer a wide discretion - it could look at any number of factors it considered relevant - but the contract also stated that the employee’s pay would be treated in a “manner broadly consistent” with his peers.

He received a bonus of €1,275,685 which he considered too low as it only amounted to around 1 per cent of the profits he had generated, whereas two of his colleagues received bonuses that were a much higher percentage of their profits. He claimed this was a breach of contract, that the employer had acted perversely and irrationally in setting his level of award, and had breached the implied duty of mutual trust and confidence.

The High Court dismissed the claim. The colleagues’ bonuses were higher because their contracts provided a clear formula for their payment, unlike the employee’s whose level of bonus was at the bank’s discretion.

The reason for the set formula was explained by various circumstances that applied at the time each of the colleagues had been hired, when there was a pressing need to incentivise and retain their services.

The court held this was a sound reason for the different bonus structure. The court said that for his claim to succeed, he would have had to show either that the employer had taken irrelevant factors into consideration when determining his bonus, or that the level of bonus was so outrageous that no reasonable employer could have reached it.

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