By Robert A. Adelson
Bonuses are a big component of the typical executive compensation package.
These include signing bonuses when you accept a job offer, performance bonuses which serve as incentives, and retention bonuses designed to keep you in your position for a period of time in M & A situations.
There is often more room for negotiating bonuses than base salary, so it is important to understand the types of bonuses and terms to seek in bonus structure that could make a difference to your total executive pay.
Signing Bonus – Unlock “Golden Handcuffs”
Companies often try to lock in key executives with compensation packages that involve vesting, requiring executives to stay in service at the company, vest, and then earn the benefit.
These are called “golden handcuffs.” Should the executive leave his or her current company to go to another firm, he or she might lose restricted stock, RSUs, or options “in the money” due to vest in the next few months.
Alternatively, the new job offer might occur just before the executive was due to earn a lucrative bonus.
In this situation, you should seek a signing bonus to make you whole for the loss of these and other timed benefits occasioned by your taking the new job offer. Thus, the new employer offers “golden keys” to unlock those golden handcuffs by offering bonuses that compensate you for the compensation lost in making a move.
Signing Bonus – Unknown Risk of a New Job
A signing bonus can be used to compensate you for taking the risk of a new job.
As a C-suite or senior executive, you’ve established yourself with the Board, CEO, and executive team. You have accumulated accomplishments and earned trust.
To take a new executive position means to give that up and start afresh in a new place where you must prove yourself again. There is also the risk that this new position may not work out. These considerations justify a second signing bonus based on your leaving your comfort zone and taking a step into the unknown.
While the signing bonus that unlocks “Golden Handcuffs” is typically cash, this second type of signing bonus is often in the form of equity in the new company. It typically includes vesting, which should be limited – usually one year. This ensures that you give the new company a reasonable chance. If you leave the position without good reason during this period, you have to pay back the signing bonus, or the equity issued is canceled.
The guaranteed bonus is designed to be paid out when the executive remains in the employ of the company through the bonus period, regardless of performance.
It is a way for the company to compensate you more without raising the base above the historical level.
However, should separation occur before the end of the bonus period, whether the company terminates you or you resign voluntarily, the company will save the bonus part of your compensation package. For that reason, the contract terms should be carefully delineated, even for a guaranteed bonus.
Executive performance bonuses are often tied to sales targets or other milestones in recruitment, product development, funding, efficiency, or other areas the company is hiring the executive to address.
The CEO’s performance bonus may be based on the whole company’s performance. Other senior executives may also have company-based performance bonuses when the company wants to encourage teamwork or when the company wants to limit bonuses to be paid only when it has had a good year.
Company performance may be determined by EBITA, profitability, or revenue. If you work in life sciences companies, sales and profitability may be years away, so the targets may be based on the progress of the lead products in development and other indications of an increasing company valuation.
A retention bonus or stay bonus is a one-time payment or a one-time retention agreement for considerations for the executive to commit to staying with the company for a set period of time or through to a planned event (for example, an acquisition).
Cash consideration may range from 10% to 25% or more of the executive’s base compensation.
However, alternatively or additionally, it may involve significant fixed or variable equity or other considerations important to the executive, often quite negotiable. The retention length of time the executive commits to staying, the level of commitment, and duties to be performed may also vary, and they too are negotiable.
How Bonuses Are Calculated and Paid
It is important to understand the terms and targets that apply to your bonuses, as the amount can be very large compared to your base salary.
Your executive employment contract should be clear and specific about the bonus structure and provide a formula or mechanism for how the bonus would be calculated and paid out. It should not contain language such as the bonus is in the “sole discretion of the company.”
Performance targets can be set up in complex ways.
You want to ensure the bonus structure is designed to reward you properly for your achievements. The targets for bonuses should be set early in the year so that you know what you need to achieve.
If bonuses are to be paid after the company has the complete financials for the year, your contract should allow for payment of the bonus should you be terminated without cause prior to the payment date.
Bonuses are a substantial part of your executive compensation package. Getting the terms of bonus payments right can make a big difference to your final take-home pay. It is wise to consult with an experienced executive compensation attorney in these matters.
Robert A. Adelson, Esq. is a corporate and tax attorney and principal of Adelson & Associates, LLC, Boston, Massachusetts. https://www.executiveemploymentattorney.com
He represents CEOs, C-Level, and senior executives on various issues, including employment terms, tax-favored equity, bonus and LTI compensation, change of control, retention, separation, wrongful termination, noncompete, and restrictive covenants. Email: email@example.com
© 2022 Robert A. Adelson