Are Executives Entitled to Variable Compensation after being Terminated?
This blog reviews a recent Ontario Court of Appeal decision, Manastersky v. Royal Bank of Canada, 2019 ONCA 609, that considered whether or not an employer can discontinue a variable compensation plan that accounts for about 50% of an executive’s total compensation.
In 2001, Mr. Manastersky was recruited to work as a director of a Mezzanine Fund at RBC. He was eligible to earn compensation under a variable compensation plan called a carried Interest Plan (the “Plan”). Each year he was awarded points under the Plan. The grant document stated that the award of points for a year did not constitute any agreement or commitment by RBC “to award the same amount of points or any points at all in the future or for future years.” In June 2014, RBCDS decided to wind down the Plan and did not introduce an alternative form of variable compensation. Shortly thereafter, after 13 years’ service, Mr. Manastersky was terminated without notice of termination.
Mr. Manastersky sought, among other things, compensation equal to the value of the variable income he historically earned under the Plan when it was in existence during the reasonable notice period. There was no dispute that the Plan did not exist during the reasonable notice period.
The judge concluded Mr. Manastersky should have received 18 months notice of termination and, when calculating wrongful dismissal damages, ordered the employer to pay him variable income based on the variable income he historically earned under the Plan. This was more than 50% of his total compensation. This decision was subsequently overturned by the Ontario Court of Appeal.
Court of Appeal Decision
Majority (2 judges)
The majority decision took a strict legal interpretation of the applicable agreements relating to the Plan and concluded: “I do not see how RBCDS’ termination of the [Plan] in accordance with its terms, which were known and agreed to by Mr. Manastersky, could amount to conduct by an employer that evinces an intention to no longer be bound by the employment contract.”
In short, the majority concluded Mr. Manastersky signed an agreement stating the employer could terminate the Plan at any time and the court decided to enforce this clear and unambiguous contractual language.
Dissent (1 judge)
The dissenting judge took a contextual approach and concluded that, although the income Mr. Manastersky earned under the Plan was discretionary, it was an integral part of his compensation and the employer was required to continue paying him comparable variable compensation if it decided to terminate the Plan.
Instead of taking a strict, literal interpretation of the relevant Plan documents, the dissenting judge looked at real world business realities. He agreed with the trial judge who stated: “the job description stated that the successful candidate would be offered a ‘highly attractive compensation package, including base salary, annual performance bonus and participation in the [F]und’s carried interest’ [emphasis added]. The respondent’s participation in the Plan was provided for as part of his ‘compensation program’ and agreed to in his contract of employment.”
The dissenting judge also adopted the following findings that were made at trial. The trial judge noted: “Over the course of his 13 years of employment with RBC, the respondent’s CIP share represented well over 50% of his total annual earnings” and concluded that “the provision that allowed RBC to unilaterally discontinue the Plan, a particular mechanism of part of the compensation, does not contain clear language that has the effect of removing the employee’s right to receive compensation in an amount equivalent to what he would have earned through that mechanism during the period of reasonable notice.”
Lessons to be Learned
1. This is one of several recent Court of Appeal cases that have considered whether or not an executive is owed variable compensation during the applicable notice period. The law is unsettled and, accordingly, there is considerable litigation risk in this area of the law at the moment. I would not be surprised if this case is appealed to the Supreme Court of Canada. Stay tuned.
2. Based on this case, it appears that if an employer wants the right to preclude an employee from receiving variable compensation during the applicable notice period, then job applications, offers of employment, plan documents and any other documentation relating to the person’s position and/or compensation must be clear and unambiguous.
3. If your organization pays executives for performance and doesn’t want to pay an executive during the applicable notice period because they are not performing, consider having an employment lawyer review your plan (and other relevant) documents to ensure that you do not receive an unexpected litigation surprise.
For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416-317-9894 or at firstname.lastname@example.org