Skip to main content

Bonus! Executive Incentives and Termination Rights

Scott Dallen

Associate
February 28, 2024

Executive-level compensation typically includes more than just a salary or an hourly wage. Executive compensation plans often include incentives and bonuses designed to attract and retain top talent in the field.

Some incentive plans commonly available to executives include:

  • Cash-based bonuses for performance or tenure;
  • Equity-based incentives, including:
    • Stock option plans
    • Share appreciation plans
    • Restricted share unit plans
    • Performance share unit plans
    • Deferred share unit plans
  • Contributions to pension plans and other retirement benefits
  • Perks including vehicles, technology, memberships, etc.

While an employee’s entitlement to such incentives during the course of employment may be clear, what happens after the employment ends is often much less clear.

It is crucial for both employees and employers to understand what incentives an employee is entitled to on their way out the door.

Wait, Where’s My Bonus?

Terminated employees are entitled to their regular wages during their notice period, but they are often caught off guard when the bonus they expected does not come through. Employers often withhold such bonus payments where the employment relationship has ended, particularly where the date bonuses are paid out falls after the employee’s last day. Is the employer required to pay?

Luckily, the Supreme Court of Canada has clarified the issue in its recent judgment of Matthews v. Ocean Nutrition, 2020 SCC 26.

In Matthews, an employee was entitled to a long-term incentive plan (LTIP) in the event Ocean Nutrition was sold. Mr. Matthews’ employment was terminated before such a sale took place, but the company was sold 13 months later. Mr. Matthews was entitled to pay in lieu of notice for a period of 15 months.  

Ocean Nutrition took the position that Mr. Matthews, who had worked his last day 13 months before the sale, was not actively employed and was therefore not entitled to payment of the LTIP.

The Court disagreed, finding that a terminated employee is entitled to every aspect of compensation they would have received had they worked through the notice period. Mr. Matthews was awarded over a million dollars.

Employers must be careful to ensure they are not withholding incentive payments employees are entitled to.

Employer Strategies to Limit Incentive Payments

Employers may seek to limit their exposure to bonus payments by including contractual language that a bonus only available to “actively employed” employees or is “discretionary”. While such clauses can be effective if properly drafted, they often fall short of insulating the employer from liability.

Mr. Matthews’ contract stated that he must be “actively employed” to receive the LTIP payment. The Court confirmed that such a clause did not limit his LTIP entitlement. An employee is deemed to be “actively employed” until the end of the reasonable notice period.

Even where incentives are not mandatory or performance-based, they may still be payable where they form an integral part of the employee’s compensation package. For example, in determining whether a bonus is “integral”, courts will consider:

  • Whether a bonus is received each year, although in different amounts;
  • A bonus is required to remain competitive with other employers;
  • The employer has not historically exercised its discretion not to award the bonus; and
  • The bonus constitutes a significant component of the employee’s overall compensation.

(see Gillies v Goldman Sachs Canada Inc., 2000 BCSC 355)

In those circumstances, employees should insist on payment of their bonuses and, accordingly, employers should exercise caution when relying on clauses that label a bonus as “discretionary”.

There are steps employers can take to successfully limit liability, including by using clear and unambiguous language, implementing ‘forfeiture clauses’, and providing written notice of changes to incentive plans.

Real-World Examples

To better understand the complexities of executive bonuses, it can be helpful to consider some hypothetical scenarios. The following are examples inspired by common situations in the world of employment law:

  • Sarah is an executive who has been working at her employer for several years. Her contract includes an annual performance-based bonus, which is typically paid out in March based on the company’s performance the previous year. In January, Sarah’s employment is terminated. The Company acknowledges she is entitled to 5 months’ notice of termination, but opts to terminate her effective immediately and provide her with pay in lieu of notice. In March, bonuses are paid out to continuing employees, but Sarah doesn’t receive hers. Sarah consults an employment lawyer and learns she was considered “actively employed” in March and is owed her full bonus payment.
  • Donny is a Director at a startup. His contract entitles him to stock options that vest after 2 years of employment, but it also includes a clear and unambiguous clause that states his entitlement to exercise the stock option is forfeited upon notice of termination. After two years pass, Donnie exercises half of his stock options. A couple months later, the startup dismisses Donnie without cause and provides him with pay in lieu of notice equivalent to 3 months’ wages. Donnie is unable to exercise the remaining options because the contract unambiguously limits his common law right.
  • Raj is a C-Suite executive at an insurance company. He has worked there for 9 years, and has received a discretionary bonus of varying amounts each year of his employment. On average, the bonus accounts for 30% of his overall compensation. The company terminates Raj’s employment and offers him a severance package but refuses to pay his bonus from the previous year. Raj has a claim for wrongful dismissal since the bonus is an integral part of his compensation.

Takeaways

Recent decisions make it clear that executives in BC will typically be entitled to their incentive payment or bonus if it would otherwise have been paid out during the notice period.

It is highly recommended that dismissed employees seek legal advice to ensure they are receiving all their due entitlements owed during the notice period.

Employers should be aware of the heavy burden on them to successfully limit their liability regarding incentives and bonuses and take steps to ensure their employment agreements are properly drafted and regularly reviewed.

Please contact us to discuss executive compensation and severance packages. We want to help!