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Speaker's Corner: Assessing the validity of employee bonuses

Employees don’t always get the bonus they deserve. Seldom will this amount to a successful lawsuit. Veteran investment banker Kenneth Mathieson was well rewarded in his good years.

 In 2005, he earned a bonus of $1.1 million. However, after receiving a poor performance evaluation for fiscal 2006, Mathieson’s employer, Scotia Capital Inc., decided he deserved a sharply reduced bonus of only $360,000, the lowest amount he had received in his position since heading up one of the bank’s industry groups.

Because his bonus made up the largest component of his compensation, Mathieson believed the bank was attempting to force his resignation. He wasn’t about to go quietly.

Mathieson vigorously protested his bonus award to his superiors. They listened to his concerns but ultimately remained firm in their decision as his 2006 performance wasn’t at par with his colleagues, and revenues across the entire department were down by 20 per cent.

Eventually, after becoming fed up with the protests, the bank fired Mathieson. He sued for more than $20 million, claiming damages for the additional bonus he said had been reduced in bad faith and more than 32 months’ pay in lieu of reasonable notice along with bad-faith damages stemming from the manner in which he said he was treated.     

At a recent trial, Justice Michael Code found there was nothing unreasonable about Mathieson’s 2006 bonus award. He had received the lowest performance score for employees at his level, according to the bank’s standard criteria. Therefore, the decision to reduce his bonus was entirely rational.

Mathieson sought to draw an inference that, since the 2006 bonus bore no relationship to the amounts in prior years, it was awarded irrationally and in bad faith. However, the court disagreed. Although there’s always an element of discretion in granting bonuses, in this case, the bank had exercised it fairly. 

Further, on the issue of bad faith, the court found there was nothing sinister or unfair about the process Scotia employed and that it wasn’t a ruse used to drive Mathieson to quit.

Management’s response to Mathieson’s concerns didn’t even begin to rise to the level of bad faith, according to the judge. Senior bank officials repeatedly gave Mathieson a hearing so he could raise his concerns but were entitled to dismiss his appeals as long as they did so on a principled basis.

Simply put, the bank was able to demonstrate that, although Mathieson’s bonus award was lower than previously, it had a reasonable justification for the figure it imposed.

As a result, Mathieson’s claim to additional bonus compensation and bad-faith damages were swiftly dismissed, and he was ordered to pay a large component of his former employer’s legal costs.     

Mathieson’s bonus compensation may apply to few cases. However, the court’s legal findings about bonuses apply much more broadly to Canadian workplaces, so both employees and employers should consider the following issues emanating from this decision:

•    Fairness: Courts are reluctant to supplant an employer’s assessment of performance and bonuses as long as the process it followed was fair and consistently applied. Here, the court commented that “fairness” involves using reasonable criteria that are communicated and applied consistently among employees.

However, since the court also confirmed that a fair and reasonable process is an implied term in the employment contract, it left the door open for employees to continue to claim constructive dismissal in cases alleging that the method used to analyze bonus compensation was improper.

•    Bonuses: Few bonuses are truly discretionary, even those assessed with discretionary factors. That is, once employees receive a bonus year after year, it may be elevated to an implied term of the employment relationship such that they would be entitled one as a component of their severance.

Although Mathieson lost the big issue in his case, he was still awarded $920,000 after his termination representing an average bonus payment over 24 months as a component of his severance during that time. 

•    Challenging bonus awards: It wasn’t just cause for his dismissal, but Mathieson’s increasing protests ultimately led to his termination, not a reconsideration of the amount.    


Daniel Lublin is an employment lawyer with Toronto law firm Whitten & Lublin LLP. His practice focuses on the law of dismissal, and he can be reached at dan@toronto-employmentlawyer.com.

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