Executive Compensation and Post-Employment Incentives

Understanding Executive Compensation Packages

Executive compensation extends far beyond basic salary, encompassing various incentives designed to attract and retain top talent. These typically include:

• Cash-based bonuses tied to performance or tenure
• Equity-based incentives (stock options, share appreciation plans, restricted share units, etc.)
• Pension contributions and retirement benefits
• Perquisites such as vehicles, technology, and memberships

While these entitlements are usually clear during employment, considerable confusion often arises regarding what happens to these incentives after employment termination.

Legal Framework for Post-Termination Incentives

The Supreme Court of Canada clarified this issue in Matthews v. Ocean Nutrition (2020). The Court established that terminated employees are entitled to all compensation components they would have received had they worked through their notice period.

In this landmark case, Mr. Matthews was awarded over one million dollars from an incentive plan that materialized during what would have been his notice period, despite no longer being “actively employed” when the triggering event occurred.

Employer Limitations and Employee Entitlements

Employers often attempt to limit incentive payments through contractual language specifying that bonuses are only for “actively employed” employees or are “discretionary.” However, these clauses frequently fail to protect employers from liability.

The courts have established that:

• Employees are deemed “actively employed” until the end of their reasonable notice period
• Even “discretionary” bonuses may be payable if they form an integral part of compensation
• Bonuses can be considered integral if they are received regularly, are market-competitive, or constitute a significant portion of overall compensation

Employers can limit liability through clear language, proper forfeiture clauses, and providing written notice of changes to incentive plans, while employees should be vigilant about claiming all entitled compensation.

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:

Miguel is a senior marketing director who has been with a media company for five years. His compensation package includes a quarterly performance bonus, typically paid at the end of each quarter. In early February, Miguel is terminated without cause. The company provides eight weeks of pay in lieu of notice but refuses to include the first quarter bonus that would normally be paid in March. Miguel consults an employment lawyer and discovers that since he is legally considered “actively employed” throughout his notice period, he is entitled to the March bonus payment as part of his severance.

Lisa is a VP of Technology at a growing fintech firm. Her contract includes restricted stock units that vest annually over four years, with a provision explicitly stating that “unvested RSUs are immediately forfeited upon termination of employment for any reason.” After three years, Lisa has received 75% of her RSUs. When the company terminates her employment and provides appropriate severance pay, she cannot claim the remaining 25% of her RSUs because the contract language clearly and unambiguously limits her common law entitlement.

Thomas has served as CFO at a manufacturing company for 12 years. Throughout his tenure, he has received an annual “discretionary” year-end bonus ranging between $75,000-$120,000, representing approximately 40% of his total annual compensation. When Thomas is terminated in November, the company offers a severance package that excludes any bonus for the current year, claiming it’s purely discretionary. Thomas has strong grounds for a wrongful dismissal claim as the consistent payment history and significant proportion of his compensation make the bonus an integral part of his remuneration package, despite being labeled “discretionary.”

What Have We Learned

Recent court decisions have firmly established that executives in British Columbia are typically entitled to receive their incentive payments and bonuses if these would have been paid during their notice period. This principle applies regardless of whether the employee is physically present in the workplace during this time.

The legal framework surrounding executive compensation continues to evolve, but one thing remains clear: employers face a substantial burden when attempting to limit their liability regarding incentives and bonuses. Standard clauses requiring “active employment” or labeling bonuses as “discretionary” may not provide the protection companies expect.

For dismissed executives, it’s crucial to recognize that your entitlements may extend well beyond your basic salary. Failing to claim these additional components of compensation could result in significant financial loss. We strongly recommend seeking professional legal advice to ensure you receive everything you’re rightfully owed during your notice period.

Employers should take proactive steps to review and update their employment agreements regularly, with particular attention to compensation provisions. Clear, unambiguous language that specifically addresses post-employment entitlements is essential for managing potential liability.

How Taylor Janis Workplace Lawyers Can Help

Taylor Janis is a team of dedicated employment law specialists serving clients throughout Alberta and British Columbia. Our practice is singularly focused on workplace law and protecting the rights of employees at all organizational levels.

With deep expertise in executive compensation issues, we provide strategic guidance to both employees seeking to enforce their entitlements and employers looking to develop legally sound compensation structures. Our thorough understanding of this complex area of law allows us to offer practical solutions that address the unique circumstances of each case.

Whether you’re an executive facing termination or an employer seeking to mitigate risk, our team can help navigate the intricacies of incentive plans, bonus structures, and post-employment entitlements. Contact Taylor Janis Workplace Lawyers today to ensure your interests are properly protected.

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