Bonus, Shares and LTIPs in a Senior Executive Settlement Agreement: What You Can Protect on Exit

For senior executives(opens in new tab) in listed or private equity-backed businesses, deferred compensation is often the largest single component of a settlement package. Accrued bonus, unvested LTIPs, PSP awards and restricted stock are routinely left out of first-draft settlement agreements, or valued at less than they are worth. Knowing what you can protect, and where the negotiating room actually sits, changes the outcome.

What Happens to Your Bonus When Employment Ends in a Settlement Agreement

A settlement agreement(opens in new tab) will contain a broad waiver of claims, and that waiver usually covers anything arising from a bonus scheme, incentive plan or discretionary payment. If your bonus is not dealt with separately somewhere in the agreement, assume the waiver has caught it. Read the draft before you sign anything.

A contractual bonus that accrued before your termination date is a debt. Your employer owes it to you, and dismissal does not extinguish it unless you sign that right away. In Rutherford v Seymour Pierce Ltd [2010] EWHC 375 (QB), the High Court rejected the employer’s attempt to imply a term requiring the employee to remain employed and not under notice on the bonus payment date.

Discretionary bonuses are harder to claim, though the argument is often there. English courts have confirmed that an employer’s discretion to award or withhold a bonus must not be exercised irrationally or in bad faith (Braganza v BP Shipping Ltd [2015] UKSC 17). Where the withholding looks arbitrary, or the decision lands close to your exit date, you have an argument worth running.

Timing matters. Terminations in professional services between November and March, and in technology around RSU vesting dates, are not always coincidental. If your exit looks designed to defeat a bonus entitlement, say so. That’s an argument you can run.

Contractual vs Discretionary Bonus: Why the Distinction Matters on Exit

Start with the exact wording of your bonus clause. “Sole and absolute discretion” reads like a wall. Under English law it isn’t one. In Braganza, the Supreme Court confirmed that discretion can’t be exercised irrationally. In Keen v Commerzbank AG [2006] EWCA Civ 1536, the Court of Appeal recognised outer limits on employer discretion, including that it can’t be exercised capriciously.

Accrued entitlement is usually calculated up to your last day of employment. But the scheme wording governs it, so check your employment contract and the bonus documentation for the accrual provisions, the payment conditions, and any requirement to remain employed or not under notice.

Clawback clauses can survive termination. In financial services, the applicable FCA and PRA remuneration rules may permit clawback for seven years. For certain PRA-designated Senior Managers, that period runs to ten years where the relevant conditions are met. Signing the settlement agreement can itself trigger a clawback obligation under the scheme rules, so confirm that before you sign.

Custom and practice can create an implied contractual right even where the contract calls the bonus discretionary. Pay something consistently for enough years, without exception, and it hardens into an entitlement. Courts look at the pattern of payment, at scheme communications, at payslips, and at comparator evidence (Park Cakes Ltd v Shumba [2013] EWCA Civ 974).

Good-Leaver vs Bad-Leaver Status: The Pivot Point for Unvested Equity

For executives holding LTIP, PSP or deferred bonus awards, this is where the largest sums sit.

Most scheme rules define good-leaver and bad-leaver categories, and the employer or the remuneration committee usually has some discretion over how your departure gets classified. Good-leaver status can mean unvested awards vest on a pro-rata basis. Bad-leaver treatment can mean you forfeit them entirely.

Make good-leaver designation an explicit negotiating point in the settlement agreement. Genuine redundancy helps. So does length of service, and company precedent, and the plain disproportion of bad-leaver treatment against the actual circumstances of your departure.

Accelerated vesting is a legitimate ask in senior exits, particularly in PE-backed businesses. Listed companies have more to work around: their remuneration policy, the scheme rules, and the remuneration provisions of the UK Corporate Governance Code. Compromises still get agreed, time-based pro-rata vesting among them.

Deferred bonus may survive termination, depending on the scheme rules. Don’t write it off without reading the documents. LTIP rules often contain built-in discretion that can be exercised in your favour. That discretion is negotiating room, and asking for it isn’t asking for a favour.

Can Your Employer Withhold Your Bonus as a Negotiating Tactic?

If your employer refuses to pay a contractual bonus, you can bring a breach of contract claim. Where the claim arises or remains outstanding on termination, an employment tribunal can award up to £25,000. Claims above that, the civil courts, where the cap doesn’t apply.

Withholding a bonus alongside a dismissal on some spurious ground can support an unfair dismissal(opens in new tab) claim, and it strengthens your position at the negotiating table. Where an employer is assembling a performance or conduct case to justify not paying, that exercise itself can strengthen your claim.

Respond in writing. Set out the contractual basis for the entitlement, and ask for payment within a reasonable period. That gives you a paper trail. It also forces the employer to put its position in writing, which is usually the more useful of the two.

How to Negotiate Bonus, Shares and LTIPs into Your Settlement

Before you discuss numbers, audit your remuneration in full. Base salary, target and maximum bonus, deferred bonus amounts and their vesting dates. LTIP and PSP grant dates with current valuations. Share options, restricted stock, pension contributions, benefits in kind. Request your total reward statement, then read your contract alongside every scheme document that touches any of it.

Present accrued contractual bonus as a debt your employer owes. Treating it as a chip to trade gives away money you already have a right to. The real negotiation starts with discretionary bonus and unvested equity.

The first offer will almost always omit or undervalue deferred compensation. Counter in writing, with a detailed schedule of your total compensation and claim value attached. That’s standard practice, and it moves the number. Uplifts of 30% to 100% between the first offer and the final agreement are not uncommon in senior executive departures.

Never accept or reject an offer verbally in a protected conversation before you understand the full value of your deferred compensation position. Rights get given away in those meetings, quietly and for nothing.

Tax on Bonus Payments in a Settlement Agreement

Any payment that would have been paid as a bonus during employment is taxable in full as employment income, whatever the settlement agreement calls it. HMRC looks at the substance of the payment, not the label.

The £30,000 income tax exemption under s.403 ITEPA 2003 applies only to genuine ex gratia compensation for loss of employment. Payments in lieu of notice fall outside it. So do accrued holiday and bonus entitlements.

Since April 2018, the part of a termination payment representing unworked notice has been subject to income tax and national insurance as earnings, under the post-employment notice pay rules in ss.402A-402E ITEPA 2003. It applies whether or not your contract contains a PILON clause, and whether or not anyone has labelled the payment as notice pay.

Structuring the package properly reduces the overall tax burden, and there’s nothing improper about doing so. Outplacement support is tax-free under s.310 ITEPA 2003. Employer contributions towards legal fees are typically non-taxable where they meet the statutory conditions, including where the payment goes directly to your legal adviser in connection with the settlement agreement. Pension contributions within the available annual allowance can be a tax-efficient part of the package too. Whatever the structure, the agreement should say plainly how each payment is meant to be taxed.

Ready to Protect Your Compensation on Exit?

If you are in settlement negotiations and your package includes deferred bonus, unvested LTIPs or share awards, David will tell you what you can protect and where the negotiating room actually is. His practice is senior executive and board-level exits, including complex departures from listed companies and FCA-regulated firms.

If you would like to discuss your position, contact David(opens in new tab) to arrange a confidential consultation