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Bonuses Can Be a Battleground - Use a Professional Draughtsman!

Bonus provisions in employment contracts provide fertile ground for dispute and that is why professional drafting is necessary to iron out ambiguities. That point was well made in a Court of Appeal case in which two high-flying bankers argued that they had not been properly rewarded for their contribution to their employer’s profits.

The men were recruited to run a bank’s equity-based derivatives desk and, in their first year of employment, received guaranteed bonuses of £10 million between them. Thereafter they were entitled to bonuses calculated on the basis of what was referred to in their contracts as ‘economic value added’. The interpretation of that phrase became the focus of all the subsequent proceedings.

The men had successfully branched out into investments bonds that were marketed as retail investments by independent financial advisers. Although the bonds did not themselves represent a revenue stream, they brought very substantial deposits into the bank that it could use to generate revenue.

After departing to take up new posts, the men launched proceedings against the bank, claiming that their bonuses in their final year of employment had been wrongly assessed at nil. It was submitted that their bonuses should have been calculated on the basis of the total profits that their activities generated for the bank, including profits arising from the deployment of the deposits.

The men’s desk – when taken as an individual activity centre and without account being taken of the alleged wider benefit to the bank of the deposits – had made a loss in the relevant year. In rejecting their claims and finding that no payments were due to them, a judge preferred the bank’s interpretation of ‘economic value added’.

In ruling on the men’s challenge to that ruling, the Court found that ‘economic value added’ meant the revenue generated by the men’s desk before tax, minus costs. That was the formula applied to all the bank’s other business units. The fact that the bank had agreed to make enhanced bonus payments to the men during two previous years of their employment could not affect the outcome of the case. The appeal was dismissed.