Bonus / Superstars / Termination Pay - CompDoctor October 1998

Q: Our VPs are divided about when to pay bonuses. Some of our management people are only on the annual program, based on the company's reaching specific revenue and profit goals. Other VPs want to put some of their management people on monthly bonus plans and the annual plan. How do other companies handle this? -D.D.

CompDoctor: Monthly and annual bonuses! What a deal - where do I sign up? If I were a manager at your company, I'd take the money and run for as long as it lasted. Then, in a down year, if I didn't hit paydirt, I'd be outta there.

Bonuses are usually based on financial performance and measurable objectives. They usually pay out at the end of the year so that you have a full year of performance to use. If bonuses are paid out early and the rest of the year is terrible, you would realize only in hindsight that, if measured over the whole year, those bonuses should not have been paid. That's why most companies stick to an annual bonus.

It makes sense for another reason too. Companies report profit and loss on an annual basis for tax purposes, so handing out bonuses then allows for greater flexibility and a lot more reality.

Having said that, there is a rule of thumb that you have to keep in mind: Rewards are most effective if they follow the performance very closely. This serves to reinforce the behavior that you want - better than waiting for a full year. Some companies compromise and pay out only a portion of the earned bonus, say 25 percent to 40 percent, on a more frequent basis, often quarterly, and then reconcile the bonus at year-end. This way you deliver the immediate reward without paying out more than is earned for the year.

Now let's talk nonmonetary incentives, because that's where you need to be creative to get people to perform at their best from month to month. How about a gift of tickets to a game or some other noncash award if certain targets are met? This will encourage your people to go over and above, while adding a little fun to the "game" of top-notch performance. By the way, you mentioned paying bonuses only to management people. I hate to drag you kicking and screaming into the '90s, D.D., but forward-thinking companies are bringing lower-level employees into the program too. If your company employs more than two people, you should be thinking about that as well. Bonus programs can inspire everyone to become part of a successful team. Why leave anyone out?

Q: We have identified several key employees, each of whom is critical to the success of our business. If any of them left, our whole company would suffer. What compensation strategies can we use to make sure these people stay? -C.F.

CompDoctor: C.F., you've put your finger on the year's hottest compensation issue, thanks to a raging bull market coupled with record-setting low unemployment. The landscape of the '90s is littered with executives bereft of their best and their brightest, at the expense of those loyal but less valuable employees who remain.

The fact is, there is no guarantee that key people won't bail unless you tie them to their desks - or snap on those ankle monitors that prisons use for folks under house arrest. And although indentured servitude is reputed to exist within some companies, I know for a fact that it was outlawed a few hundred years back.

Fortunately, that leaves several perfectly legal strategies, any of which I can recommend without hesitation. First, however, a caveat: Make sure these people are truly essential to your bottom-line business, and that you are not regarding them as "key" simply because they are skilled at self- promotion. I don't mean to be condescending. You'd be surprised at how often that mistake is made.

The first line of defense is to pay generous salaries - about 15 percent to 20 percent more than they could get anywhere else. Second, if your company is publicly traded, give them stock options. Private companies can offer a phantom share plan or a deferred compensation plan that will grow as the company grows. Either way, serve up options that have value on day one but require vesting for three to five years before the employee is allowed to cash them in. You can always grant additional options in future years for meeting new performance targets.

Now let's say you cannot afford to outmuscle your competitors in the area of salaries. You may be able to differentiate yourself by offering the best 401(k) plan around, with generous matching that gets ramped up when certain performance targets are met.

Other goodies that show key employees just how much you love them include free financial planning and tax preparation services, or personal assistants who can run errands or have the tires rotated on the Lexus.

So how do you make sure you're not just stocking the larder for employees who may soon hit the trail? You have them sign an employment agreement restricting their ability to work for a competitor within 12 to 18 months of their departure date, and requiring substantial forfeiture of the value of their bonuses or phantom plans. While it's normally impossible to get current employees to sign a noncompete, you can stipulate the agreement as part of the deal when you announce a new compensation program, or a change in the present program. You don't have to make participation optional.

If these suggestions don't work for you, C.F., you might simply tattoo their forehead with the company logo. That'll work.

Q: We are planning to terminate a long-term employee whose performance no longer justifies his pay. His age is in the mid-50s. What is the standard severance package in this case? -J.W.

CompDoctor: Given your eagerness to adopt a "standard" severance package, J.W., I might infer that you run a nondescript company, producing generic products, with flatline revenues and nothing-special profits. In fact, if your office has cubicles, I am betting that they're beige.

All of which says there is no such thing as a standard severance package, whether for long-term or short-term employees. In fact, the longer Mr. 50s has been there, the more flexible you will want to be, assuming that he has contributed substantially over the years. And if you have been at all gutless about telling him how much his performance has suffered, and that he probably shouldn't be dreaming of a gift-wrapped gold watch, it may cost you some green stuff to compensate. For example, most companies start with an offer of one week's pay for each year of service, capped at the equivalent of one full year's pay. (But that roughly corresponds to 52 years of work, which your employee cannot have accomplished unless he came on board wearing diapers.) Then, if the aforementioned gutlessness or something similar occurred, you might sweeten the offer to, say, one and a half weeks of pay per year of service.

If the termination is particularly sensitive, and your e-mail indicates that it may be, you might consider offering severance pay plus a consulting contract. In other words, help him go into business for himself while your company continues to benefit from his experience. Another way to soften the blow, and to preserve your relationship, is to have someone else deliver the news, and then position yourself as a sounding board during the transition.

Finally, and this is essential: PUT IT IN WRITING. Have the employee sign a release stating that by accepting your offer of severance pay, he agrees not to bring suit against the company for age discrimination or any other improper conduct. Emphasize that if he ever hopes to golf with you again, he'd better sign it. Of course, you need to avoid replacing him with someone half his age, or you could place yourself in jeopardy.

Note: Last time I checked, Harvard still hadn't sent me my juris doctorate, so none of this constitutes bona fide legal advice. You will have to get that on your own.

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