Page 406 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

392 The Complete Guide to Executive Compensation

Assuming the corporate and group targets were met, the bonus would be as follows:
CEO bonus $60,000
Group A VP bonus:
Corporate portion 0.30 ($60,000) $18,000
Group portion 0.00015 ($70,000,000) 0.0015 ($5,000,000) $18,000
Total bonus $36,000, or 60% of CEO bonus
Note that in the above example the group VP would have received a greater or smaller
group portion depending on group performance. To the extent group performance was
better than budgeted, the VP would have a bonus higher than 60 percent of the CEO’s; to
the extent group A’s performance was less than budgeted, the VP’s bonus would have been
less than 60 percent of the CEO’s incentive payment.
A comparable calculation can be made for the other group VP; note that the bonus
percentages will have to be different from the other group VP in order to attain the desired
relationship to CEO pay since group B’s targeted income is $30 million (an increase of $5
million). Perhaps 0.00025 of sales while retaining the 0.0015 of increased net income would
be justifiable. This would be a targeted bonus of $15,000 that, when added to the $15,000 for
corporate (i.e., $60,000 0.5 0.5), would yield a total of $30,000, or 50 percent of the
CEO’s bonus.
If “income before allocation” is deemed more appropriate for determining a group
performance incentive, comparable values can be determined in a similar manner through a
series of trial-and-error calculations until acceptable formulas are developed.
It is imperative that such formulas be reexamined each year to ensure that values are
still appropriate. In most cases, it will be necessary to make at least minor adjustments in the
formula values. Such minor annual adjustments preclude major problems in future years.
Some companies are reluctant to give large bonuses for fear of poor shareholder rela-
tions. These companies are misdirecting their apprehension; the focus of concern should not
be the size of the bonus but rather the relationship to performance and the amount of the
total compensation package! As a matter of fact, it is in the shareholder’s best interest that a
large segment of top management’s total compensation be in bonus incentives structured to
reward success and penalize failures. How often would a corporation reduce the salary of one
of its managers if the division did not meet its objectives?

Year-to-Year Pay Comparison. To illustrate that raising or lowering performance level can
have an impact on total compensation, let’s continue our example for the executive in grade
25. Table 7-44 showed that the executive received a $97,902 bonus for a 5.3 rating; assuming
the same rating was used for salary purposes, the $350,000 salary (which was in the middle
one-third) was probably increased 11 percent, or $38,500, using the earlier described
performance matrix (Table 5-25 in Chapter 5). Thus, the individual received $486,402 (i.e.,
$97,902 $350,000 $38,500). Now let’s examine the dollar impact of varying levels of
performance the following year on current compensation using Tables 5-25 (Chapter 5) and
7-31. Table 7-46 shows the salary increases and bonus amounts for different levels of
performance. Salary increases are for the middle one-third, on the assumption that the struc-
ture increased sufficiently for the individual to retain the position; if not and the executive is
now in the upper one-third, the salary range maximum of $395,500 (shown in Table 7-30)
would limit many of the salary increases. Bonus calculations are based on current salary.