Last week I discussed the concept of compensation, which I got a lot of comments on. The last few blogs have been specifically related to the “top guns” in our industry. These top guns can either be public finance bankers, municipal financial advisors, or bond counsels. To be a “top gun” basically means that you have no concern about bringing your deals and/or your book of business to a new firm. These “top guns” are extremely rewarded in the year 2021. Now it is time to address the entire concept of the signing bonus and/or guarantee.
2 Reasons A Firm Provides A Signing Bonus And/Or A Guarantee
Why would a company provide a signing bonus and/or a guarantee to a prospective employee? There are simply two reasons. One is that they are being compensated for the amount of business they are potentially leaving on the table. That is presenting an incentive to make the move sooner rather than later in the year. A second reason for a signing bonus and/or guarantee is one of retention. Many of the firms are using these vehicles to increase the likelihood that a “top gun” will stay with the new firm. This will become much more apparent as we discuss the different forms a bonus takes and how they are distributed.
Signing Bonus In Cash
Between a signing bonus and/or guarantee, let us start off first with a simple signing bonus in cash at the start of the new employee’s arrival. I have had firms opt to give a signing bonus strictly in cash. With no strings attached to “top guns”, the new firm is hoping to convince them to make a move as soon as possible. These cash contributions have no claw back and are exactly that – a cash payment to the new employee within the first thirty days of his/her hiring. The reason a firm would do this is to show that they are excited and want this new employee. The second type of signing bonus is one that is distributed in the form of a promissory note.
The Promissory Note
Many firms are opting to provide upfront cash bonus secured by a promissory note when it comes to the options of signing bonus and/or guarantee. These notes are usually extended anywhere from three to five years in maturity. The way these notes work is that a firm will advance you the amount that they agreed upon in a lump sum within 30 days of your hire each pay period. The firm will advance you enough money to make the required loan payment on the note for that period. If you continue to remain as an employee, all loan payments will be made for you. Should you, at any time, decide to leave the firm, the balance of the note will become all due and payable within a reasonable period depending on the terms of the note. As you can see this is an excellent retention tool that is providing a great incentive to continue to stay at the firm, knowing that this loan will be paid for you every month until the loan is extinguished. Should you opt to leave and go to a new firm, what happens is that the new firm will advance you the money to cover your existing note and replace it with a note by that firm or some other financing vehicle.
The Guaranteed Bonus
A guaranteed bonus is an amount agreed upon that a firm will pay you at the end of your first full year of employment. This guaranteed bonus is always considered a minimum bonus, not a maximum bonus. The rationale for this is that firms are aware of a ramp up period for any new employee. They want to help you alleviate the stress of starting a new business at zero. However, what I have seen is that the guaranteed bonus usually becomes the minimum as most “top guns” will move more than 85% of their existing business within their first year. Some firms are even opting for a two-year guaranteed bonus, thus relieving a new employee with any concern of what his W2 will look like. Some firms are giving a higher guaranteed bonus in the first year and lowering it in the second year. This stimulates a banker/bond counsel to make additional bonus faster in that second year, knowing that their guaranteed income is reduced. As a concluding note, many people have asked me about the tax implications of the notes, signing bonus and/or guarantee. I recommend before accepting any financial contributions other than a salary to discuss the tax and legal implication with your CPA and/or your attorney.
If you would like to discuss your options, please reach out for a confidential conversation at 760-477-1284 or email at firstname.lastname@example.org. 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.
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, Health Care Bankers, Municipal Financial Advisors, Compliance Officers, Issuers, and Bond Counsels.