UK: Bonus adjustments in light of COVID-19

Whilst the full effects of the COVID-19 pandemic on the global economy are not yet known, it is fast becoming clear that it is having a growing economic impact. As the financial markets slump and cashflows become constrained, companies with annual bonus arrangements will need to start considering what adjustments (if any) are needed to their bonus arrangements to help mitigate against the economic downturn caused by COVID-19.

Depending on their specific arrangements and where they are in their bonus award and pay-out cycles, examples of bonus arrangements which merit immediate further consideration in the current climate are:

1. pre-existing bonus awards subject to deferral

2. recent bonus awards granted but not yet paid;

3. bonus awards in respect of the last performance year which have not yet been made

1. Pre-existing awards subject to deferral

Companies should be considering whether downward adjustments to pre-existing “in flight” bonus awards that are subject to deferral can and need to be made. Whether such adjustments can be made will depend on the terms of the relevant bonus plan rules and award documents which would need to expressly provide for the power to adjust the deferred elements of the award if adjustments are to be made without participant consent. Whether such amendments need to be made will depend on the financial circumstances of the company and its regulatory obligations, if any.

Firms subject to financial services regulation are expected to already have adequate adjustment provisions included in their bonus plan rules and should be able to demonstrate that appropriate adjustments have, where appropriate, been made.

In terms of lesson learned going forward, to the extent existing deferred bonus arrangements do not provide for the ability to adjust awards, companies may want to think about whether they amend their plans to ensure they are fit for purpose to deal with any adjustments which may be required from a business perspective going forward.

2. Recent bonus awards not yet paid

Some companies will have recently reached their performance year end, made bonus awards to staff before the COVID-19 outbreak took hold but not have paid them out yet.

It is unlikely that companies in this position will be able to reduce bonus awards unilaterally. However, this does not mean companies have no options should they need to make cost savings. In such cases, companies may wish to explore with their employees whether they would be prepared to forgo part or all of their awards, particularly at senior levels, given the extreme circumstances, as a way of contributing to greater security for the wider workforce in the company.

3. Bonus awards yet to be made

Some firms will be approaching year-end bonus decisions and will be considering the quantum of bonus pools, as well as individual award levels. Such companies will need to consider whether awarding bonuses is appropriate for this bonus round, whether the decision in relation to bonus awards is deferred until more is known about the economic impact of COVID-19 over the coming months, or if bonus awards are to be made, then how to factor in COVID-19 downward adjustments to bonus outturns.

Financial services regulated firms have a regulatory obligation to adjust bonus pools for all types of current and future risks (and this would include the economic risks posed by COVID-19), and to apply risk adjustments in a clear and transparent manner. It is pertinent that the remuneration risk adjustment provisions applicable to these firms arose out of the 2008 global financial crisis and the COVID-19 pandemic my result in not too dissimilar economic consequences. With that in mind, regulators will no doubt expect firms to demonstrate how risk adjustment has been utilised in bonus decisions in the current climate.

In these troubled and uncertain times, it is more important than ever to ensure clear ongoing communication with employees. Whatever decision is ultimately taken by a company in relation to its bonus arrangements, it is advisable to keep employees fully informed and engaged in the process to ensure employee relations are not damaged.