Bonus and variable compensation when an executive leaves
When an executive or senior executive leaves a company, variable compensation and bonuses can represent a significant financial consideration.
Targets achieved but bonus not yet paid, departure during the year, continued employment conditions, pro rata calculations, or variable compensation relating to a period already worked: several factors need to be reviewed before determining the terms of departure.
As an employment lawyer, I advise executives and senior executives in Aix-en-Provence and Paris on assessing their compensation entitlements and incorporating them into their overall departure strategy.
What happens to your bonus when you leave the company?
An employee’s departure does not, in itself, determine what happens to their bonus.
The first step is to identify the nature of the compensation concerned and the rules governing its calculation and payment.
The employment contract, amendments, variable compensation plan, annual targets, collective agreements and any other applicable documents should be reviewed to determine the executive’s entitlements.
This analysis should therefore be carried out before concluding that a bonus has been definitively earned or, conversely, forfeited solely as a result of the departure.
How is variable compensation determined?
Variable compensation may depend on individual, collective, quantitative or qualitative targets.
Before leaving the company, it is important to identify:
- the applicable calculation rules;
- the targets set for the relevant period;
- the extent to which those targets have been achieved;
- the conditions governing payment;
- any applicable pro rata rules;
- the usual payment schedule.
This analysis helps assess the amounts that may be due and incorporate them into the overall financial assessment of the situation.
If you leave during the year, is your bonus payable on a pro rata basis?
When an employee leaves before the end of the relevant reference period or before the usual bonus payment date, the question of a pro rata payment may arise.
The answer depends in particular on the nature of the compensation, the period to which it relates and the conditions set out in the applicable documents.
It is therefore necessary to distinguish between the date on which the bonus is paid and the period of work or performance to which it relates.
Can a continued employment condition result in the loss of a bonus?
Some compensation schemes require the employee to remain with the company on a specified date.
The effect of such a condition must be assessed in light of the relevant scheme, the nature of the bonus and the period to which it relates.
The existence of a continued employment condition does not therefore automatically mean that all variable compensation is forfeited when an employee leaves.
For an executive or senior executive, this can become an important factor when determining the timing and terms of departure.
What happens if the targets were not clearly defined?
Variable compensation requires clear rules for determining the amount payable.
Where targets were not communicated, were communicated late, or where the calculation method is disputed, an assessment of the situation may be necessary to determine the employee’s entitlements.
These issues can become particularly important when a departure occurs at the same time and the amount of variable compensation needs to be taken into account during negotiations.
For further information on the removal or modification of a bonus, see also our article: Can an employer remove or change a bonus or variable compensation?
Deferred bonus: should you wait until it is paid before leaving?
An executive or senior executive may be considering leaving the company a few weeks or months before a bonus is due to be paid.
However, the payment date alone is not sufficient to determine the appropriate strategy.
The terms governing the bonus, the period to which it relates, any continued employment conditions and the proposed terms of departure should all be reviewed.
Depending on the circumstances, the timing of the departure may therefore become part of the negotiation.
Including bonuses in departure negotiations
A departure offer should not be assessed solely on the basis of the severance payment offered.
Bonuses and variable compensation should be included in the overall financial assessment of the departure, alongside the notice period, other compensation components, benefits, the non-compete clause and, for some executives and senior executives, the management package.
This makes it possible to compare the different scenarios and assess the overall financial value of the offer more accurately.
Bonuses, management packages and equity: understanding the different issues
For some executives and senior executives, compensation includes both a bonus or variable component and equity-based incentive arrangements.
These elements are not necessarily governed by the same rules and should be assessed separately before being incorporated into an overall financial analysis.
Where BSPCEs, stock options, free share awards or other equity arrangements are involved, a specific assessment of the management package and the implications of departure may be necessary.
When should you have your variable compensation reviewed?
A review can be carried out as soon as an issue arises concerning the setting of targets, the calculation of variable compensation or the payment of a bonus.
When a departure is being considered, it is advisable to carry out this review before the departure date and terms have been finalised.
This makes it possible to identify any amounts that may be due and incorporate variable compensation into the different negotiation scenarios.
An employment lawyer in Aix-en-Provence and Paris
I advise executives and senior executives in Aix-en-Provence and Paris, both in person and remotely, on assessing their compensation and the financial implications of their departure.
Consultations can be conducted in French or English, particularly for international executives and senior executives whose compensation includes multiple components or schemes defined at group level.
FAQ
Frequently asked questions about bonuses and variable compensation when leaving a company
Contact domaniewicz avocat
42 Avenue Victor Hugo
13100 Aix-en-Provence
9 Rue Treilhard
75008 Paris
+33 6 23 61 20 01