Page 386 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

372 The Complete Guide to Executive Compensation

below the average of this group, as shown in Table 7-22. Thus, if the company EPS were
120 percent of the industry average, the bonus fund would increase by 40 percent.
Unfortunately, this approach is cleaner in concept than in fact simply because of differ-
ences in weight of product mix even among companies that are supposedly comparable.
Which companies to include and how to weight them are questions sufficiently open to debate
in most cases. Therefore, when the analysis does not generate the amount management thinks
appropriate, they will apply pressure to modify the basis of comparison.

EPS as Percentage Adjustment to
of Industry Average Bonus Fund
150% 200%
140 180

130 160
120 140

110 120
100 100

90 80
80 60

70 40
60 20
50 0

Table 7-22. Bonus fund vs. industry average EPS
Carryover Provisions. Sometimes companies will find that the performance is not suffi-
cient to generate an incentive fund. This always creates a problem because invariably there
are individuals who should receive an award because of their performance. Some companies
will simply shrug their shoulders and indicate “that’s the way cookie crumbles.” Others, con-
cerned about losing top performers but not wanting to violate the terms of the plan, will look
to something else, such as a special stock option grant (covered in the long-term incentive
chapter). Others will make an exception to the plan and award some discretionary payments.
The problem with this approach is that the company has lost credibility. Individuals will in
the future also look for the company to provide money even if the fund does not.
An alternative sought by others is to ensure the bonus formula is sufficiently liberal that
there are always monies left unused. By terms of the plan, this amount would be carried
over to the next bonus period, thus avoiding the problem of what to do if the next year’s
performance generated no bonus pool. The carryover amount could be used to reward the
outstanding individuals. Such plan provisions typically apply for only one year. Two successive
years of poor performance create a problem in the second year. However, by that time some
drastic changes will be needed anyway.