Page 393 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 379

Bonus Pool by Attainment
Division Minimum Target $19,000,000 $20,000,000 $21,000,000

A $16,000,000 $19,000,000 $1,000,000 $1,330,000 $1,670,000
B 16,000,000 20,000,000 750,000 1,000,000 1,250,000
C 16,000,000 21,000,000 600,000 800,000 1,000,000
Table 7-29. Bonus pool by sales attainment for three divisions

Some plans require that whatever has been generated, and allocated, must be distributed.
However, it is believed that a much more logical approach is simply to use the fund as
the maximum limit. Furthermore, as indicated earlier, in a number of instances, the plan
formula provides that the unused amount may be carried over—in many cases, indefinitely.
Some form of carryover is often needed to provide for the contingency that the company
formula produces an insufficient amount to compensate divisions with outstanding years.
When companies do not permit a carryover of unused funds, divisions will apply greater
pressure to adjust targets during or after the year based on those factors that they consider
beyond their control (e.g., late release of new product). While there may be sufficient justi-
fication for such actions, management must be careful to avoid charges of simply changing
the targets to ensure an adequate payout. Some might logically ask why the payout targets
for the professional manager should be lowered when the owner-manager does not have the
same opportunity.
Structuring the Individual Payouts Example. Regardless of the specific nature of the
deviation from the basic approach of two or more funds providing the total award, it is
important to describe how this interaction is done statistically. An example has to be
constructed for this purpose. The fictitious Brucell Corporation has 35 salary grades, and all
persons in grade 20 and up are eligible for bonuses.
In setting up the individual award schedule, the objective is, if possible, to incorporate
annual incentive guidelines without affecting the compensation midpoints used for grading
positions. Otherwise, jobs would have to be regraded. Steps to take include the following:
• Midpoint total compensation should equal salary range midpoint plus target bonus. This
remains the value for market pricing the position (e.g., for grade 35, the total com-
pensation midpoint $1,390.9, shown in Table 7-30, is the same as the salary midpoint
shown in Chapter 5 in Table 5-4).
• Minimum and maximum salary is constructed around the salary midpoint to give the
same spread as current schedule (for grade 35, this is 8.6 percent of $1,095.2 or 18.9
percent maximum over minimum).
• Midpoint total compensation is salary midpoint plus bonus midpoint [for grade 35, this
is $1,095.2 ($591.5 2) $1,390.9].
• Maximum total compensation is salary maximum plus bonus maximum for grade 35, this
is $1,189.6 $591.5 $1,781.1), the same as Table 5-4’s total maximum.
Bonus percentages are calculated by first determining the maximum for each grade. This
is determined by dividing the bonus dollar maximum by the salary maximum (for grade 35,
this is $591.5 $1,189.6 49.7%). For aesthetic purposes, we’ll round this to 50 percent,
which is divided by six to get guidelines for ratings 1, 2, 3, 4, and 5 (i.e., 8.3%, 16.7%, 25.0%,