For some employees, their annual bonus forms a significant part of their employment compensation. Even where the employment contract specifically provides that a bonus is discretionary, an employee may come to expect an annual bonus at a particular level based on what the employee consistently receives for several years running. In such circumstances, can the employer reduce the bonus?

This question was discussed in the 2009 Ontario Court decision in Mathieson v. Scotia Capital Inc. Kenneth Mathieson had been an employee of Scotia Capital or its predecessor, for over 30 years, eventually rising to a senior level in the investment banking group before he was terminated without cause in 2007. Mr. Mathieson received annual discretionary bonuses, which, in 2005, was in excess of $1 million. His bonus in his last position at Scotia Capital had never been less than $500,000 until in 2006, with a new CEO at the helm of the company, Mr. Mathieson’s bonus award was only $360,000.

Mr. Mathieson was not happy about the significantly reduced bonus that he received in 2006 and made numerous complaints to his superiors at Scotia Capital. He also sought a transfer from the group he was working in because he felt the opportunities were limited. After many discussions between Mr. Mathieson and the senior management at Scotia Capital failed to resolve Mr. Mathieson’s complaints, the company decided to terminate him. The company offered him 18 months salary in lieu of notice. Mr. Mathieson did not accept the severance offer and so Scotia Capital unilaterally paid him salary continuance for a 24 month period. Mr. Mathieson sued, claiming, among other things, that Scotia Capital was not entitled to reduce his bonus, and he was entitled to a bonus, on the same levels previously granted, for 2006 and the severance period.

On the first issue – whether Scotia Capital breached Mr. Mathieson’s contract of employment by paying him the reduced bonus in 2006, the conclusions reached by the Court were as follows:

• While the factors considered in determining the annual bonus were weighted differently in 2006 than they had been in the prior 6 years (there was more emphasis on revenues generated from equity offerings, mergers and acquisitions of the group), the Court found that the company had the right to change the emphasis placed on each of the various performance criteria set out in its written bonus policy. The policy stated that the process would be managed at the CEO level and the Court accepted that the weighting of the criteria applied was “eminently a matter for the CEO’s business judgment.” Given that the changes were communicated and applied generally to the employees, it found that Mr. Mathieson had no grounds for complaint.
• The evidence adduced by Scotia Capital at the trial of Mr. Mathieson’s claim demonstrated that the bonus determination process employed by the company a great deal of time, care and collaboration on the part of the company’s senior management. The process took approximately two months to complete and involved several meetings amongst the senior managers, including the CEO, to discuss bonus recommendations which were ultimately considered and ratified at the Board level.
• Scotia Capital’s senior managers met on several occasions with Mr. Mathieson to discuss his performance review, his dissatisfaction with his bonus and their reasons for not agreeing to his request to transfer out of this group. Mr. Mathieson had also put forward written submissions on several occasions addressing his complaints. The Court found that Scotia Capital had acted fairly in giving Mr. Mathieson several opportunities to be heard.

Thus, the court found that Scotia Capital was entitled under the circumstances to have awarded the bonus it did in 2006, even though it was less than what Mr. Mathieson had received in previous years.

The court then considered whether Mr. Mathieson was entitled to a bonus during the 24 month salary continuance/severance period. It is a well understood employment law principle that if an employee receives a bonus for several years running, the entitlement to a bonus may become an implied term of the contract even if the right to a bonus is not expressly spelled out in the written contract or stated to be ‘discretionary’. In Mr. Mathieson’s situation, the court found that an annual bonus was indeed an implied term of his employment contract and thus he was entitled to be compensated for the loss of this bonus during the severance period. For some reason, Scotia Capital did not lead any evidence as to what bonus Mr. Mathieson was likely to have earned during the notice period and as a result, the Court made its best guess and awarded Mr. Mathieson $920,000 for the 24 month severance period.

Disputes over bonuses often surface when an employee is terminated without cause. Whether or not the bonus was an implied term, and what bonuses the employee would have earned during the reasonable notice period are important considerations when determining the severance an employee is entitled to upon termination without cause.

The Scotia Capital decision confirms that an employer may award an employee significantly less bonus than an employee may have earned in previous years, provided the bonus assessment was based on at least some objective criteria known to the employee, and the analysis and decision as to the amount of bonus was done fairly, with due consideration to all relevant information. In Scotia Capital’s case, they were assisted by the fact that its employees kept detailed written records regarding its evaluation of Mr. Mathieson, the process by which it determined the amount of his bonus as well as all of the meetings held to try to deal with Mr. Mathieson’s complaints. These records proved invaluable in demonstrating that Mr. Mathieson had been treated fairly.