How to handle bonuses in times of mass layoffs

CBC/Radio-Canada is in the headlines again this week with the disclosure that it paid out $18.4 million in executive bonuses during a fiscal year where it also eliminated hundreds of positions — and has thus far refused to disclose if and how much of a bonus its CEO received.

The controversy has created a debate about the appropriateness of executive bonuses and variable pay structures during tough times.

HRD Canada spoke with employment lawyer Maggie Campbell of Roper Greyell in Vancouver about the best ways to approach variable pay restructures.

Balancing executive bonuses with employee optics

Canadian employment laws provide some flexibility to employers regarding bonuses and variable compensation, Campbell says. However, she acknowledges the difficulty for employers to “thread that needle” of balancing competitive compensation packages for executives when other employees may have had pay cuts or even lost their jobs.  

“I think that's a tough thing for employers to get right. The reality is that executives steering the ship in a very challenging time, who are able to successfully do that, sometimes that involves making cuts and changes,” says Campbell.

“The reality is that that does reflect good performance, and they're contracted to receive a certain amount of compensation for. That may look very different from what is happening with other people's compensation but it doesn't mean that they're not doing their job.”

Consent for renegotiating variable pay packages

Getting consent for renegotiated terms of variable compensation packages is a simple way to legally go about the process while avoiding legal pitfalls, Campbell says, pointing out that it’s a tactic often overlooked by employers.

Negotiating with executives around variable pay may be easier when the health of the company is at stake, she says; if an employer foresees that big annual bonus payouts could potentially do reputational harm or hurt the morale of other employees, it’s possible executives might be open to adjusting their compensation.

“If it’s going to be very unflattering or damaging to the business, and the business’s reputation, to roll out a really generous variable pay package in a year where the industry is struggling, the executive may be willing to come to the table and renegotiate,” Campbell says.

“It is really difficult in this economy, where we're seeing reductions in workforces and terminations, increased cost of living and wages that haven't necessarily kept up – I think it's very, very challenging for companies to get that right.”

Variable compensation a necessary recruitment tool for top talent

The main challenge to reducing or renegotiating variable compensation structures is the competition of the labour market, she says, with top-level executive talent expecting top pay.

An alternative to large performance-based annual payouts is offering higher base pay, Campbell says, which would see salaries flowing out of monthly coffers, making compensation “less noticeable”.

"It's challenging, because you want to attract and retain top talent, right? And if the market demands a certain level of compensation in order to track that and retain that top talent, companies have to be competitive with what they're providing,” she says.

“I think the reality is that executive variable pay for executives is not something we're going to see disappear. Those individuals can and do command significant compensation packages with variable pay that allows them to reap the benefit of their performance and their leadership in the company. They do a good job. They steer the ship."

BREAKING

In a shocking display of incompetence and greed, the CBC has given itself $18.4 million in bonuses.

Despite cutting hundreds of jobs, executives gave themselves bonuses averaging over $73,000—more than the median family income.

The CBC must answer. The CBC must be… pic.twitter.com/wze584yeKG

— Rachael Thomas (@RachaelThomasMP) August 12, 2024

Any renegotiation of compensation must involve clear documentation and communication about terms and conditions, to avoid inadvertently triggering constructive termination, Campbell says, meaning all negotiations and deals should be clear and in writing.

“Everybody should be clear on what's happening and why, especially if you're going to that executive and asking them to voluntarily agree to a change in variable pay. It should be very transparent and it should be very well-documented, so that executive has a really clear understanding of what it is they're referring to."

Variable compensation for more employees

Alternatively, offering similar pay structures to more employees in the organization, rather than only top executives, can go a long way to improve optics as well as employee interest in the business, says Campbell.

Organizations offering scaled variable pay packages to a wider range of employees is common, she says, “so that everybody has some ability to receive a variable pay bonus that reflects both the corporate performance and their individual performance."

“I do think that really helps incentivize individual performance, and makes individuals care about the overall performance of the organization, which is always a good thing."