New Job, New Bonus Plan

by Staff - Original publish date: January 18, 2012

Let's say your resume is current, and you are beginning to speak to a few companies about a potential move. Here are some things to think about regarding your bonuses as you consider offers.

Pay Mix Varies by Industry
Let's say you are contemplating joining a company in a different industry, although you intend to continue doing what you're doing now. The company you are joining is offering a much larger bonus than you are currently earning, but is ruling out that larger salary you were hoping for. That is, it has a different pay mix. Pay mix varies from industry to industry.

Certain industries pay comparably smaller salaries than others, but may emphasize bonuses to a much greater extent. The reason is that incentive pay is intended to reward those who directly affect the top line (revenues) or the bottom line (profit). Some industries rely heavily on the contributions of individuals to revenue- or profit-generating activity.

Investment banking is a well-known, extreme example. In fiscal year 2000, the CEO of Goldman Sachs - a large and profitable investment bank - earned a base salary of $600,000 and a bonus of more than $14 million. This industry customarily pays millions in bonuses to employees several rungs below the CEO. Investment banking, even in the age of stock options, is still known to be one of the best-paying industries of all.

Traditional manufacturing companies, on the other hand, do not pay large bonuses. Instead, employee compensation is largely in salary; bonuses make up a small portion of total pay. For example, in fiscal year 2000, the CEO of Dupont made more than $1 million in base pay and $1.7 million in bonus. The more traditional and older the industry, the more likely it is that bonuses will be small relative to salaries. Steel, paper, and oil are examples. Newer and often riskier industries are likely to pay larger bonuses. Among these include high-technology companies and professional services companies engaged in activities such as consulting, advertising, and investment banking. In the middle are consumer goods and pharmaceutical companies.

The way bonuses are presented also differs from industry to industry. In most industries, they are presented as a target bonus with an upside equal to some multiple of the target (often 150 to 200 percent). In professional services companies, the maximum is presented. In this case, bonuses are usually adjusted downward, not upward. In investment banking, the likely bonus payout is presented with the understanding that there is unlimited upside.

Don't Leave Money on the Table
Sign-on bonuses are given to employees to establish goodwill and to buy out any compensation left on the table from a previous employer.

Before joining a new employer, be sure to account for every kind of compensation program in which you participate. Your sign-on bonus should pay for the loss of your unpaid bonus; any kind of profit-sharing bonuses or defined contribution (for example, a 401(k) match or an Employee Stock Options Program (ESOP)) made to your retirement account that is expected to be paid within two to three months; and unvested stock options that are in the money. Senior-level people may also include the value of supplemental benefits such as nonqualified deferred compensation and certain perks.

The value of your unpaid bonuses and defined contributions should be based on what you expect to earn. Unvested in-the-money stock options should be valued based on what you would get from them if they could be exercised now. The resulting total provides a starting point for what your signing bonus should look like.

For those stock options that won't vest for at least another year, calculate their current exercise value and think about how much you want to be paid for walking away from it. But remember, your new company can justify saying no because you will be earning options on your new company instead.

Understand the Expectations
Let's say you are considering a job offer that makes you eligible for the company's annual incentive plan. Before saying yes or no, make sure you understand the annual incentive plan targets, including both company goals and individual objectives.

You should also think about how you will meet the expectations laid out in the bonus plan and what resources you will need for meeting them. Without the resources to achieve your bonus target, you may be setting yourself up for frustration or even failure. Think twice before accepting a job offer that makes you accountable without creating the conditions for success.

If you are convinced that an offer is a good opportunity, negotiate not only for the resources but also for a guaranteed minimum of at least half your target bonus. If no objectives are given to you, again, ask for a guaranteed minimum.

Understand the Bonus Season
Ask how your eligibility for the bonus plan is affected by your start date. For example, some companies won't pay a bonus if you start working in the last three months of the fiscal year.