It's easy to see why more and more companies are wielding ransom-sized bonuses to reward and retain executives. Granting large bonuses takes a lot of uncertainty out of the compensation equation.
Stock options, while still an effective way to keep officers around, may take years to pay off. Boards, not wanting to risk waiting for options to vest, are looking for more immediate incentives and prizes.
Of course, companies could also address base salary levels. But there's a built-in reason not to: The IRS caps the deductibility of executive compensation at $1 million, unless the pay is performance-based. That leaves bonuses as the most fertile ground for growth.
It's not hard for executives to cash in on the trend. Companies including Triarc, Brinker International, and Advantica were generous in doling out sweeteners amounting to 200% or more of the executive's base salary. Other companies were a bit more conservative. Cheesecake Factory, for instance, caps bonuses at 50% of base salary.
"We feel if we push too hard you end up hurting the guest," says Cheesecake CEO David Overton, noting that if bonuses were more lavish managers might cut corners on food or labor costs to boost the bottom line. "Managers might produce more profit but it's not quality profit."
Some companies would have granted larger bonuses, but did not because performance didn't justify them. McDonald's CEO Jack Greenberg, who took home a bonus of $1.4 million, could have made significantly more, but the Golden Arches didn't hit its earnings numbers. The same story applied at Tricon Global, where CEO David Novak received a $680,000 bonus. Novak left $200,000 on the table as Tricon failed to reach its pre-determined targets.
"In reviewing Mr. Novak's individual performance, the Compensation Committee considered several criteria on a subjective basis including Tricon's 2000 EPS [Earnings Per Share], store level margins, same store sales and return on invested capital," the Tricon proxy states. "In the case of each criteria listed in the previous sentence, the Committee determined that performance was below established targets."
The moral? "If bonus structure is aligned correctly, it can be at risk as much as stock options," says Dave Mansbach of HVS.