Page 366 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

352 The Complete Guide to Executive Compensation

Maximum
Award

Target
Award

Threshold
Award

Threshold Target Maximum
Perfor- Perfor- Perfor-
mance mance mance
Figure 7-3. Threshold, target, and maximum bonus opportunities

payments would be limited to outstanding performers who otherwise might leave the
company. Conversely, some believe it inappropriate to override the plan formula and
provide discretionary payments.
A multiple-goal bonus can be developed using the same approach. Table 7-4 shows a
matrix for two performance variables. For example, if performance were at target for objec-
tive A but at threshold for objective B, payout would be at 60 percent. This is the average of
100 percent (target and 20 percent (threshold) for single-measurement plans.

Objective B Performance
Objective A
Performance Threshold Target Maximum
Maximum 100% 150% 200%
Target 60% 100% 150%
Threshold 10% 20% 100%
Table 7-4. Multiple performance bonus opportunities

FORM AND TIMING OF AWARDS
It is difficult to discuss the last two subelements separately. The form of the bonus is cash
and/or stock, and the timing is current and/or deferred. If the individual leaves during
the year in which earned, the amount is typically forfeited. The same applies to leaving
before deferral payment dates. However, most companies will prorate the amount in case of
disability or death.
The matrix in Table 7-5 shows the nine possible combinations of form and timing, rang-
ing from an immediate lump-sum cash settlement to a combination of cash and stock, one
part paid immediately and the remainder in deferred installments.
Certainly the current cash payment (#1) has the greatest impact on the lower-level
executive. Even though a third or more of the award may be lost in taxes, the balance still
represents a significant increase in the recipient’s income. Due to family obligations (e.g.,