It’s Lonely At The Top: What Can We Do About Executive Bonuses?

It’s Lonely At The Top: What Can We Do About Executive Bonuses?

2009-04-01 08:04:11

Bashing the compensation and bonuses of executives has become a household conversation.  Seems like everyone has an opinion on the AIG bonuses that were paid last week and the debate over “who and what was right” will rage on for a few more news cycles.

But from it all, there are some lessons in those payments – and the contracts that allowed them — that would be good for all executives to learn about and carry forward:

  • Everyone is watching. Sumner Redstone of Viacom is well-quoted saying that, “the further the gorilla climbs up the tree the more you can see of his a**“. Welcome to the life of being a senior executive. With the title and perks, there comes a responsibility to act and respond like a leader.  That means that everyone is watching what you do and what you receive. Becoming finely tuned to what the rest of the company, including what your shareholders, think has always been part of the business, but it’s more important now than ever.  If the rewards don’t match the performance, then you should question whether or not the payments are the right payments and the bonus plan is the right bonus plan. 
  • Delayed gratification. Sometimes it’s better to have a bonus deferred and just wait for “better timing.” Part of the issue with the bonus payments at AIG was that no matter how legal or rationale at this time when the nerves of taxpayers who funded those bonuses are raw, no matter what they paid was going to be scrutinized. The same happens in other corporations where one division of the company may succeed but the overall company is failing.  That would be the time to look at deferring payments to some other time. You can’t tell me that in hindsight if AIG had it all over to do again that every one of those executives who are being hounded and hunted in Connecticut wouldn’t have taken a deferred payment versus go through what they have gone through.
  • One size fits one may be wrong. For too long we have come up with bonus programs that sweep across a job category or group of people by level and title and then we apply a multiplier to a salary and that is the cash bonus payment – paid out on a schedule that everyone follows. It may be time to rethink those one size fits all programs and instead go back to the days of the personalized bonuses that don’t always have to be cash.  For example, additional vacation time might be many multiples of value more than cash for some while for others offering equity might be a great incentive.  A myriad of things could replace cash compensation that could still recognize performance while not as onerous as large cash payouts in this market.
  • 100% top to bottom buy-in required. Whatever you do, now is the time to ensure that there is true buy-in with the payments and the plan to be delivered.  That means the Board, all of Senior Management, the HR team, the external compensation consultants and — in this day and age — your corporate communications/PR team.  You need 100% consensus in the program to make sure the right thing is being done.  If there are any questions or concerns  among your internal stakeholders  about the plan, payments or,  people then it may be time to totally rethink what you are doing.
  • Don’t lower the bar – ever! Remember the genesis of bonuses – rewards for  performance and work  that is “above and beyond.”  Too many companies allowed for their bonus payments — or portions of it — to be considered as secure in being paid from year to year, regardless of the results.  When bonuses start to become thought of as delayed annual income for people, they become more relied on and people begin to feel entitled to the payment each year.  Management – and the Compensation Committee – need to avoid temptation, in the tougher times,  to lower the performance bar to make some payments. While good for short term morale, the underlying credibility of the bonus plan is corrupted.

It’s a new era and it requires new thinking – and likely new programs.  And, Boards, management and employees at all levels should work to keep the bonus programs open and transparent to ensure the incentives accomplish their objectives.

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