The Federal Court recently ruled that under the Fair Work Act, deferred bonuses – previously forfeited when employees leave the company – must be paid when the period to which the bonuses apply is concluded. This decision triggers a need for all companies to review their short term incentive (STI) plans.
GRG Remuneration Insight 176
29 May 2025
Earned Bonuses or Awards Cannot be Further Service Tested
A recent case in the Federal Court of Australia, Wollermann v Fortrend Securities Pty Limited (2025) FCA 103, has triggered a need for all companies to review their short term incentive (STI) plans. The case was decided under the Fair Work Act 2009 (Cth) (the Act). It held that the Act operated to require payment of bonuses even though part was withheld pending completion of a period of service. In this case, and as is often the case when retention is desired, if the employee ceased employment prior to completion of the service period the deferred amounts were to be forfeited.
In that case the terms of the employment contract were construed by the judge to mean that the bonuses were earned with completed work and the deferred amount needed to be paid to the employee irrespective of whether or not the service period was completed.
Key Implications for STI Plan Documentation and Design
This case does not mean that incentive awards cannot be subject to service or performance tests, but it does means that if such tests are to be applied the wording of several documents needs to be clear and consistent. These documents include: employment contracts, STI offers, STI plan rules and other written material provided to employees in relation to STIs.
The other and perhaps more important implication is for boards to reconsider whether vesting conditions should be applied to deferred STI awards.
Why Vesting Conditions on Deferred STI Awards Are No Longer Viable
The current practice of deferring part of STI awards into equity which vests after completion of a period of additional service mainly arose following observations by the Productivity Commission made following the Global Financial Crisis. It was observed that STI awards should be subject to maintenance of the performance that led to the STI award in years after the award was earned. To give effect to this observation many companies deferred part of STI awards into equity so that its value would be influenced by company performance in subsequent years. Due to the way that the Income Tax Assessment Act operated at the time, the equity was necessarily subjected to a vesting condition of continued service for a specified period, so that deferral could be achieved while also deferring taxation until a time when equity could be sold to pay the tax. The vesting/deferral period was designed to expose the value of the STI award to company performance fluctuations for that period.
While the practice of deferring STI awards into equity instruments that needed to be held for a period remains a sound practice, it is hard to justify exposing the equity instruments to forfeiture. As STI awards are earned by performance during the STI measurement period it follows that the participants should be paid the awards they have earned. They should not have to earn them twice by adding a service period for vesting. This is a position that GRG has long held, and which is supported by changes to the Income Tax Assessment Act that now allow for deferral of tax without risk of forfeiture (“Restricted Rights”). However, most companies have not updated their practice and have continued service testing based on a myth that it supports retention of executives, when in fact executive tenure has continued to fall despite this practice, and sign-on bonuses have risen instead.
Avoiding STI-LTI Conflation in Executive Incentive Plans
Another more recent but generally short lived phenomenon has been for STI award opportunities to be increased by transferring LTI award opportunities into STI award opportunities and then deferring a significant part of the larger STI awards into equity with service and/or performance vesting conditions which are usually very similar to LTI vesting conditions. These are often referred to as combined, single or executive incentive plans that conflate short and long term reward structures, and which have already proven problematic for a range of unrelated reasons.
These types of arrangements are more at risk from the abovementioned court case, if documentation is not bullet proof in terms of the application of vesting conditions.
Accordingly, it would seem to be prudent to clearly separate STI and LTI plans and not to subject deferred STI awards to vesting conditions.
Incentive Plan Deferral Challenges for Regulated Financial Entities
What is not currently clear, and which will be unlikely to be clarified until a comparable court case arises for an impacted business, is how this ruling will impact companies subject to the Financial Accountability Regime, CPS 511 and CPG 511. These frameworks typically require deferral of specified portions of executive remuneration, and most impacted organisations try to make their approach bullet proof by deferring both STI and LTI at required rates. This is necessary to enable malus and clawback type arrangements, or “downward discretion” in relation to non-financial risk and conduct outcomes. Typically, the deferred STI has been subject to service requirements, however this will likely need to change to restricted equity, which GRG has long advocated.
New Barriers to Waiving Vesting Conditions for Good Leavers
Another recent nail in the coffin for service testing deferred STI awards is that listed companies now face significant hurdles when seeking to waive vesting conditions on equity. This is currently common practice for “good leavers” or as part of negotiated exits but will be nearly impossible going forward (see Remuneration Insight 177 for more info). Combined with this ruling, it is now clear that listed companies in particular should not be service testing deferred awards, as doing so presents far more risks than benefits.
Conclusion: STI Awards Are Earned, Make Plans Reflect This Reality
The view expressed in this case, which GRG tends to support, is that if short term performance hurdles are met, then the incentive award or bonus has been “earned” and is due to the participant regardless of any further service.
This has implications even for plans that require participants to be employed on the payment date i.e. after the fulfilment of the conditions, but before an award has been settled or paid.
In addition to reviewing STI plan rules and offers, companies will also need to consider whether their equity plan is able to facilitate deferral of equity in a form that will not fall afoul of this ruling. Restricted Rights are not available under many equity plans and require specialised wording and treatment in order to ensure that appropriate tax outcomes can be secured. Given the significant changes to the Income Tax Assessment Act and Corporations Act impacting equity plan design and drafting, it may be timely for companies to consider reviewing their equity plans ahead of new rounds likely to go out in July or subject to shareholder approval towards the end of the year.
In light of recent legal and regulatory developments, now is the time to ensure your incentive plans are compliant, defensible, and strategically aligned. GRG can assist with developing, designing and drafting optimised equity plans that offer not only typical performance-based equity, but also retention equity and deferral equity without a risk of forfeiture that will be the optimal choice for STI award deferral going forward.
Contact us today to schedule a discussion about optimising your executive remuneration structures.
