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ee Department for Business, Energy & Industrial Strategy
OFFICIAL SENSITIVE: COMMERCIAL
Date: 1 August 2019 nnn
From: Beth White, Deputy Director, Post Office Policy: RO
DG/SCS clearance: Lenenminnneninind
Minister/SpAd To Note/Comment To Approve/Decide
Permanent Secretary x
Kelly Tolhurst x
POST OFFICE BONUSES
Summary
Following your conversation with Tim Parker on Tuesday 20 July about Post Office
Limited (POL) senior POL bonuses, Tim Parker and Ken McCall have provided a
revised proposal which brings reductions to the bonuses of the Executive if BEIS
continue to seek a revise to the proposed bonus position. POL continue to prefer to
pay the bonus as initially proposed.
Following legal advice, it is recommended that you do not accept this revised position,
as the likelihood of challenge by the affected individuals is high and legal advice is that
this challenge is very likely to be successful. The gravity of this risk was not included in
the proposal.
We recommend that you respond:
1) ask REMCO to consider if there are ways to reduce the Group Executive
bonuses to address the concerns that you have raised, that does not create
such a high legal risk. In practice this means reducing the STIP awards rather
than the LTIP awards: and
2) agree that the STIP to the remaining POL staff, c1,450, are paid as per the
original proposal, and this proceeds to their proposed timetable
Timing
Urgent. POL have requested a response by close 2 August.
Decision
That you respond to the email from Tim Parker and Ken McCall from 31/8 to:
¢ repeat that you had asked for REMCO to identify ways to bring forward a
significant reduction to the Executive’s bonus as you outlined in your letter to
Tom Cooper;
e that you recognise that they have reflected this in the revised proposal, but,
that this proposal as presented to you does not reflect the legal risks
associated with it and that you understand those risks to in practice prohibit
them from pursuing the proposal;
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e that you would therefore like the REMCO to consider if there is a proposal
which does not incur high legal risk;
e agreeing to the payment of the STIP for those not in the POL Group Executive.
A draft response is at Annex A.
Background
1. On 23 July BEIS received notification via UKGI of POL’s proposed bonuses to
their Group Executive and its large number of senior managers (approx. 1,400
staff). You wrote on the 29" to Tim Parker and had a telephone call on 30 July
at which you made it clear that because of the judgement from the litigation,
that the discretionary bonuses of those in the Group Executive, should be
significantly reduced to reflect the judgement. You noted that those below the
Group Executive, who therefore were not in a position to influence the litigation,
should not have their bonuses impacted.
2. On 31 July, Tim Parker and Ken McCall emailed you to provide an updated
proposal, taking on board your views. This in summary proposed:
a. No changes to the bonuses provided to the senior managers below the
Group Executive, due to over 1,400 staff;
b. Recommended making no reductions to the proposed bonuses in 18/19
as POL’s preferred approach but indicated their willingness to reduce
payment in 2019/20;
c. Suggested the following possible approach to reducing 2018/19
bonuses, if that was still BEIS’s preferred approach:
i. A 10% reduction in the Group Executive’s Short-term Incentive
Plan (STIP) award;
ii. A 30% reduction in the Group Executive's Long-term Incentive
Plan (LTIP) award.
Argument
3. The proposal from POL meets your position on not impacting the Group senior
manager cohort, however, the bonuses paid to the Group Executive still remain
high, with an overall net 19.38% reduction. There is an argument that this
doesn't reflect a significant reduction in bonuses to the GE you were expecting,
especially those who were able to oversee the litigation approach, many of
whom have now left the organisation, but it would be a material reduction.
4. The recommendation in the email from Tim Parker and Ken McCall refers to a
legal risk: “We are also concerned that although the bonus schemes in question are
stated to be discretionary, discretionary schemes are vulnerable to challenge on the
basis that they have become contractual and were we to make any reductions to bonus
payments for a financial year that has already passed we could face significant class
action.”, but this sentence does not sufficiently draw out this advice, and so we
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have worked to clarify POL’s advice.
5. We have since discovered that the proposal put forward by the POL REMCO
yesterday and specifically the risk entailed in adopting the proposal (to reduce
LTIP by 30%) does not reflect the level of legal risk presented to the REMCO
by their external legal advisers. Taking a risk averse approach to legal privilege,
they did not provide an explanation of the underlying risks to the options
proposed. The proposal was a demonstration of their eagerness to find a viable
option to address the Permanent Secretary’s concerns. REMCO also
calculated that a 30% reduction to the LTIP for the far smaller cohort of
executives (c. 9 individuals) was the best of the possible commercial options
available to them notwithstanding the legal risks in the sense that it affected a
tiny proportion of the longer serving employees who were executives at the
relevant time. However, having read the legal advice, we believe we must alert
the Permanent Secretary to the real risk of further litigation and the high
likelihood of success arising if this proposal is adopted.
6. In short, entitlements to payments under LTIP are contractual and linked to
specific performance targets. There is therefore no clear contractual basis for
making a reduction (for this year). To do so could lead to claims of (i) breach of
contract and (ii) constructive dismissal (if any of the executives resign). By
contrast, and according to the legal advice presented to REMCO, there would
appear to be more room to manoeuvre under the STIP scheme to adjust the
payments which are at the sole discretion of the Post Office. This option is not
without risk, we understand that members of the GE group who are in line for a
payment under the STIP scheme constitute a slightly different and newer group
of employees than those who qualify under the LTIP and could argue that the
exercise of the discretion to cut their bonus is irrational or punitive. However, it
would appear to carry less risk that using the LTIP to reduce bonus payments.
As far as we are aware REMCO have not yet fully explored the viability of this
option so they would need to confirm that there are no other additional risks
associated with this route.
7. From the limited interactions with their legal advisers, we understand the risk to
be as follows:
e LTIP: the likelihood of members of the GE group taking legal action is medium
but the likelihood of such an action being successful is high;
e STIP: the likelihood of members of the GE group taking legal action is medium
low (we believe it is unlikely that all the individuals will be minded to take legal
action) and the likelihood of such action being successful (based on our current
understanding) is medium.
8. Based on the legal risk, we are not able to recommend to you that this proposal
for the change to the GE bonus is accepted.
9. Weare able to recommend that you continue to support the proposal that those
below the GE are paid their STIP as per normal arrangements.
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10. Tom Cooper has further advised that reductions to bonus payments should not
be carried out over multiple years due to the impact on retention. POL will need
to communicate to the individuals affected that it is not intended to repeat the
reductions in future years unless the conduct of the litigation changes or
significant new information emerges.
Options
There are 4 options available with regard to manage the GE bonus protocol:
a) If BEIS continue to seek a reduction to the bonuses paid, accept the proposal
received from Tim Parker and Ken McCall. If POL action this, there is a high
tisk of challenge by affected parties, and any challenge is likely to be
successful. Whilst the political point will have been made that POL is
addressing the bonus issue, this will lead to further public criticism of POL’s
senior leadership, have a financial cost, and risk BEIS’ reputation for supporting
such a position.
b) Support the STIP payments for those below the Group Executive as the legal
risks associated with this approach are too high.
c) Ask Tim Parker and Ken McCall to identify other ways of reflecting the
concerns held that doesn’t carry such high legal risk. It is likely that any new
proposal will be to reduce STIP payments only given that this carries less legal
risk. The Post Office will need to seek further legal advice on this point.
d) Support POL’s preferred position of the payment of all bonuses as originally
proposed and request that there is engagement with officials over the next year
to discuss the 2020 bonus payments so that we are not working against such
deadlines.
Based on the legal advice, I have discounted the option of you pushing for a greater
reduction in the GE bonus payment using the LTIP route.
Recommendations
That we follow the steps in option B and C.
Next Steps
1. That you respond to Tim Parker and Ken McCall’s email as drafted below.
2. That Tom Cooper supports REMCO considering again the options available to
POL.
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Clearance
Legal: Jane Corera
Annexes
Annex A: Draft email response (below)
Annex B: Legal advice will be sent in a separate email from Pinsent Masons
Draft email response:
Dear Tim and Ken
Many thanks for your email of the 31 July. I have reviewed this, and the legal advice
that accompanied your recommendation. Whilst your proposal has reflected my
concerns, I do not feel that the legal risks to the proposal were sufficiently raised in
your recommendation, as my understanding of these are that they are significant. I
therefore cannot support your proposal as currently drafted.
As discussed on Tuesday, I am not proposing any change to the proposed bonuses
for the vast majority of those eligible, and therefore I am content that STIP payments
are made for all eligible employees outside of the Group Executive.
My concern remains, as to how those who have overseen POLs litigation, and the
contingent liability to which POL is now exposed, have this risk reflected in their bonus
payments. Whilst I cannot support the current proposal, I ask that you consider if there
are other routes available that do not carry such legal risk and respond accordingly.
Ends
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