Page 404 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

390 The Complete Guide to Executive Compensation

shows how this 50 percent division and 50 percent employee performance approach might be
utilized. Note that the performance rating is used to look up the appropriate bonus percentage
for that grade (see Table 7-31), but only half is used (since one-half has already been set aside
for division performance). The sum of these bonuses is $198,215, or $2,985 more than
allowable (i.e., $198,215 $195,230). Therefore, the awards are proportionately reduced by
the ratio of $195,230 to $198,215, or 0.9849. Adding the individually adjusted bonus to the
division bonus produces the total for each person. These could be rounded to the nearest
$100, if deemed appropriate to finalize the calculation, as long as the division total does not
exceed $390,460.
Individual Performance Only. If the executive’s bonus is determined totally on individual
performance, the calculations are similar to those in Table 7-44. Note also that performance
in this instance is expressed to the nearest tenth of a percent. Using the individual’s grade and
performance rating, the appropriate interpolation is made within the figures on Table 7-31.
This amount multiplied by the salary generates an unadjusted bonus. The sum of the latter
is $28,310 over the allowable divisional total (i.e., $418,770 $390,460), so each award is
proportionately reduced by the ratio that $390,460 is to $418,770, or 0.932. These figures
are reported in the adjusted column, and if desired, they may be rounded. Alternatively,
rather than reduce each by the same percentage, individual adjustments could be effected as
long as the total does not exceed the control total.

Bonus
Grade Emp. Salary Perf. Percent Unadjust. Adjusted

26 AB $400,000 4.2 25.2% $100,800 $93,986
25 BC 350,000 5.3 30.0 105,000 97,902

22 CD 270,000 2.5 12.1 32,670 30,461
22 DE 230,000 5.1 24.7 56,810 52,969

20 EF 220,000 6.0 26.0 57,720 53,818
20 FG 210,000 4.1 17.7 37,170 34,657

20 GH 200,000 3.3 14.3 28,600 26,667
Totals $418,770 $390,460
Table 7-44. Bonus by individual based only on individual performance

The essential difference between the combination division individual approach and the
individual-performance-only approach is that the first smoothes out bonus variations (at the
expense of holding back on the outstanding performer and being somewhat generous with
the marginal performer). The attractiveness of the combination approach is that it rewards
group achievement (the one-for-all philosophy). This is critical if teamwork is needed and to
discourage individual performance gains at the expense of the unit.