Money makes the world go round, a truth as reliable as death and taxes. Companies often lure and retain high performing employees, particularly executives, through promises of incentive compensation. Sophisticated employees seek certainty through a written agreement specifying their compensation package, while employers often insist on maintaining a large degree of discretion over performance-based compensation. This tension frequently results in a written agreement that contains language so broad that its enforceability becomes questionable.
Retention of Absolute Discretion Places Payment at Employer’s Whim. Suppose a well-credentialed executive commences work with a new employer after signing a contract that promises a salary plus a performance bonus based on objective criteria. Now suppose the executive exceeds expectations but the employer reneges on paying the full bonus. This is exactly the scenario posed in Sathe v. Bank of N.Y., No. 89 CIV. 6810 LBS, 1990 WL 58862 (S.D.N.Y. May 2, 1990), where the court recognized the employer retained the right to deny a bonus even though the incentive plan included metrics identifying how a bonus would be calculated, because the plan included the following carveout language:
All actions of this plan committee will be subject to the approval of the chairman. This plan can be amended, terminated or revoked at any time by the chairman. Nothing in this plan shall give rise to any special compensation or other sum under this plan unless and until any such amount shall have been paid to such individual, and prior to such payment the chairman shall have the power to revoke and nullify any and all steps previously taken towards making any award to any person.