Need a recommendation on the best management bonus/incentive models.
August 16, 2007 6:39 AM   Subscribe

Need a recommendation on the best management bonus/incentive models.

I work for a mid-sized company in the advertising space and I've been tasked with reviewing our bonus/incentive program for the top management team. Through my research I've found a few existing models, but they seem overly complex for a company our sized. Anyone have any good resources I can look at regarding this (or better yet some suggested models to use)? In particular I'd like the model to accomplish the following:

1. Provide incentive above and beyond base salary across departments. This will need to address the needs of department heads, the Director of Sales and event the CEO. We're looking at 4 or 5 participants

2. Historically our incentive model has been a pool based on quarterly operating profitability. This worked well for a while but the pool has grown so quickly it has outstripped the available cash flow of the company. So the new model needs to reward the company's high performers as a team but also be sensitive to cash flow.

3. The model should payout no less than once per quarter (so we don't have an end of year cash crunch).

4. Stock options are not doable at this point as the company is privately held.

5. The incentives should reward managers for maximizing revenue and gaining repeat customers while minimizing costs. Ideally the model will also support "team thinking" as we have a very collaborative atmosphere.

Thanks in advance for any and all help/suggestions!
posted by tundro to Work & Money (3 answers total) 2 users marked this as a favorite
Being priovate does not preclude you from giving options. I would reward long term growth over quarterly profits. I would set a significant portion of any bonus as a reward for meeting year over year growth targets, either in revenues or profits. Paying quarterly in an effort to avoid a year end cash crunch is foolish. Simply take the quarterly money and invest it in a CD or some other low risk instrument until the year end bonus is due.
posted by JohnnyGunn at 7:26 AM on August 16, 2007

First off, individual incentive pay doesn't work. I think there is a lot to be said for paying a straight percentage of salary.

I think a reasonable thing to do would be to have the board decide on the bonus pool each quarter, with the metrics used described to the participants each year. (As the company's needs change, the metrics may change, too, but it gets messy if this happens too often.) If the board decides to pay more or less than the pool determined by the metrics, it should offer a brief explanation. Any other system will be overridden by the board if there are extraordinary circumstances -- why not write it that way from the start?
posted by backupjesus at 7:59 AM on August 16, 2007

I'll go one further on JohnnyGunn -- private companies not only can do equity incentives for senior executives, they should. Indeed, equity incentives are probably better for private companies than for public, because public company officers with stock options have incentives to manage for the quarter and not the long term and to do buy-backs which will increase the value of their options which will increase the value of their options without increasing the true equity value of the company.

There are all kind of turnkey legal structures that can assure that granting economic equity to senior executives won't disrupt the control, or ultimate ability to sell the company, of the current founder(s)/owner(s).
posted by MattD at 9:18 AM on August 16, 2007

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