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Bonuses: when do you have to pay out?

Incentivising the senior executive workforce is difficult in a sluggish market when there’s less money around.

Share options and share incentive schemes are a popular alternative to bonuses. They help the employee feel part of the company, giving executives a feeling of ownership in the business and a real opportunity to share in company’s success.  

So far, so good. But what if the executive doesn’t perform well? 

If an executive is under performing, you’ll need to have a conversation (or rather, negotiation) with them to agree the terms of an exit. If there are bonus schemes or share schemes in place, the departing executive will fight for all rights to be granted to them and it can be difficult for the company to argue otherwise. 

It is very difficult in fact, almost impossible to provide for this in the drafting of executive incentive schemes or share option rules. 

So, when considering offering executive incentives such as bonus, share schemes or options, make sure you consider the following: 

  1. Understand the impact on your business of “good leavers” and “bad leavers”. The latter normally covers gross misconduct where the rights normally cease immediately, where as the former includes redundancy, ill health retirement, death or retirement and the shares would all fully vest. 
  2. Consider the implications of the executive resigning. Most likely, the rights will cease on that event but there are other options available if the executive is insistent on greater protection from this event at the time of agreeing terms. 
  3. Where possible, exclude rights to claim damages for unvested shares in the contract of employment. (Note: take expert advice here as there may be circumstances when such provision could be challenged through the courts, regardless of what’s in the contract.) 
  4. Make sure any bonus schemes don’t pay our for poor performers. 
  5. Protect the business at the time of agreeing terms of executives incentive schemes with post termination restrictions.  
  6. If dealing with share options, make sure you use an expert. The area is regulated and there may be duties to notify share holders in what you want to do.

Vanessa James is partner and head of employment at SA Law.


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