While on vacation the last couple of weeks, I received a series of emails talking about bonus incentives, how they work, whether they are consistent across the industry, claw back questions, etc. Today I want to demystify the conversation about bonuses in general and be more specific as to the basis behind the concept of the bonus compensation.
Mandatory Has That Floor Guarantee
First, let’s look at mandatory versus voluntary bonus compensation. A mandatory bonus situation is equivalent to a guaranteed bonus. A guaranteed bonus is one in which a firm has hired a new employee and as an incentive for having them leave their current situation, they offer the new employee a minimum bonus guaranteed for one to two years. After the time expires, there is no longer a guaranteed minimum or a floor as to what they can earn in bonus pay. However, during the bonus period, the firm is guaranteeing the new employees a minimum total compensation for those years. Why would an employer do this beside the obvious? As a recruiting tool, they have done calculations based on a candidate’s past revenue. They feel that the guarantee is only going to be a guaranteed floor for the ramp-up period. In their minds, they believe (and it usually does work out this way) that the floor is just that, a floor, and all new candidates should exceed that guaranteed bonus.
Voluntary Keeps Everyone Honest
A voluntary bonus compensation, on the other hand, is not guaranteed but is part of the compensation plan the firm has offered its new employee. As with most firms, if they stick with the model they presented to the candidate, which is usually an exhibit to their employment agreement, the candidate then can calculate to the penny what his/her bonus compensation should be. All of this is based on the compensation model presented and the amount of origination they accomplished during the calendar or fiscal year, depending on the company’s payment policy. This is a great litmus test for the new employee. The reason I mention this is because if the new employee calculates his first-year bonus at X dollars and they receive Y dollars, they know that something is amiss. At this point, they can correct the mishap or walk with their feet. It keeps everyone honest and playing on the same playing field.
What About A Signing Bonus Compensation?
Another bonus compensation is a signing bonus. The signing bonus can be in the form of cash in their first check, or it can be in the form of a promissory note over a period of years. Since the first one cash is obvious, let’s talk a bit about the promissory note. The two major parts at play are how it is paid to the candidate and how the candidate will eventually extinguish the note (assuming all goes well at the end of the period of the note the new employee will not have any debt due and has had the full pleasure of additional compensation to incentivize them to make a move to the new company). The note is actually that – a promise to pay back the amount that is offered to the candidate upon starting the new position. Most firms will then front the payments of the note during their employment of the candidate. For example, if you have a $100,000 note for five years, each year the candidate/new employee remains 1/5th of the note, or $20,000 a year is expunged. The firm will front the $20,000 each year to make the payment, and the note is then paid off in five years provided the new employee is still employed. If for some reason he or she is not, then they will owe to the firm the remaining balance upon their exit, which is usually picked up by another firm in the form of a new note. Tax questions will not be addressed as there will be tax consequences that you should be made aware of.
Final Insights On Bonus Compensation & Incentives
There are numerous ways for a banker to be compensated. Whether it’s a guarantee or a signing bonus, the true money that is made as a banker is based on your production. Bonuses will always first deduct any guaranteed salary than any guaranteed bonus compensation before they pay an additional payout. You must cover your base salary at least one time, and some firms want it covered up to one and a half times before they will consider a bonus. AlthoughI have recently seen that the smaller firms are now offering no guarantees or signing bonuses but are paying bonuses on the first dollar earned. This is allowing the smaller entrepreneurial firms, both banking and legal, to compete with the larger firms in bonus compensation but lowers the risk to the smaller firm of a guaranteed situation.
Conclusion
If you would like to discuss your options, please reach out for a confidential conversation at 760-477-1284 or email at [email protected]. He can also be reached on LinkedIn. Subscribe to our monthly newsletter here, which is a compilation of our weekly blogs, so you never miss one. You can find our listing in the “supplier and services” section of the Red Book under the title of “executive recruiting.”
About Harlan Friedman, JD & Founding Member, H. Friedman Search LLC. Harlan is a thirty-year veteran Public Finance Banker turned recruiter who specializes in the placement of all levels Public Finance Bankers, Healthcare Bankers, Municipal Advisors, Compliance Officers, Issuers, and Bond Counsels.