Bonuses in Tough Times

There has been another flurry of news in the past few days around CEO compensation and bonuses at Fortune 500 companies. Generally, it appears that year-over-year CEO compensation has been flat in Fortune 500 tech companies, and bonus payouts are trending downward. 

Startups and expansion stage companies often look at these trends, and have a tendency to think that this ‘big company’ data doesn’t really apply to them. Yes, the orders of magnitude are enormous. Yes, CEOs in larger companies are not typically founder CEOs. No, startup and expansion stage companies don’t have to worry about public scrutiny over their executive compensation (although they should worry about Board scrutiny). And, often, startup and expansion stage CEOs and founders have opted for equity in lieu of cash compensation (often, but not always).

Sometimes, however, expansion stage companies may have to face lean times whether due to economic or execution issues.  At these times, executives are often faced with eliminating bonuses as well as paycuts.  While this can be a tough option, this can be a significant cost-savings for a company, and can make the difference between lasting through a downturn or not…and often it is the right ethical path. 

Some cautions to keep in mind if you are considering implementing paycuts or eliminating bonuses at your company:

• Set a target date for when your company will re-examine whether full pay or bonuses can be restored. Make sure that you have clearly defined what criteria must be met in order to restore full comp. Communicate these measures and the timeline to employees when you communicate the pay reductions. They need to know that the restoration of their compensation will be reviewed in an objective manner.
   
• Ensure that certain employees are not cherry-picked or excluded from the pay or bonus reductions. This needs to be equitable. If some employees (including the CEO) are still receiving full pay or are still receiving a bonus, not only is this inequitable but you are setting your company and the CEO for a significant credibility issue.
   
• It is really a good idea that the CEO make the first sacrifice, before asking employees to sacrifice. We have seen CEOs give up not only their bonuses but their entire comp in order to keep their employees as whole as possible.
   
• Think of other non-cash rewards that might be motivational for employees during this period. Low-cost options might be tickets to a show, gift cards, and electronic gadgets. While this isn’t a long-term replacement for cash compensation, sometimes these small tokens of appreciation can make a huge difference!

Compensation is probably one of the most sensitive issues in any company to wrestle with. Sometimes, we all have to make some tough choices. Making and implementing those choices the right way will make the difference between losing employees or motivating them to make it through…and build a better company for having done so.