The largest part of an executive's compensation is often the bonus.  When the employment relationship ends, these bonus payments are often reduced or not paid.  Employers argue that they have the discretion to pay the bonus or not.   But this is not the whole story.

 As a general rule, a discretionary bonus does not have to be paid.   But this general rule does not apply if the bonus is an "integral part" of an executive's compensation package.  If a bonus is an integral part of an executives compensation and the bonus has been earned by the time the employer decides not to pay the bonus, then the bonus is not discretionary.   The failure to pay a bonus in such a circumstance constitutes a breach of the employment agreement.

The Compensation Structure and Bonus Payment History

A discretionary bonus is considered integral if the employer creates a compensation structure in which the executive receives a small part of his or her income as a base salary and a bonus as the larger part of the compensation.  If there is a history of this kind pf structure in which the executive earns a comparatively small base salary and much larger bonus, then the executive may have a strong claim to his bonus because that bonus was a key part of his compensation.  From this history, a court or arbitrator may infer the existence of an implied contract.  Courts can look at the history of bonus payments to determine the appropriate bonus amount.

Discretionary Compensation Agreements 

Even if an executive has a written employment contract that provides for discretionary compensation, an employer cannot exercise that discretion arbitrarily.  Courts and arbitration panels will imply a duty of good faith and fair dealing and require the employer to base its bonus payment decision on the relevant factors and reject blanket bonus denials that appear irrational.

Verdicts and Arbitration Awards

Executives who receive bonus compensation as an integral part of their compensation have won substantial awards.   Even if the parties have agreed that the bonus is purely discretionary, executives have succeeded in winning their bonus payments if they can show that they performed according to agreed up criteria.  A recent study of executive bonus arbitration awards indicated a rise in the average award amount.