Salary.com HRVoice

- an employer paying huge bonuses and telling employees not to spend the money
- a company selling a profitable business to avoid paying a bonus, and
- a company heaping rewards upon an executive in spite of one of the worst corporate performances of all time.

The causes of these irrational pay practices and the financial system’s failure to manage risk can be debated endlessly. What is clear is that each of these companies could have done a better job at aligning pay with shareholder interests. For example, employers could have required that:

- Bonuses over a set amount be paid in stock
- Bonuses vest over a period of years
- Stock bonuses remain subject to stringent holding requirements that fade gradually upon termination
- Clawback provisions be included in employment contracts requiring bonuses to be repaid if measured performance is found to be “misstated.”

These types of plan design features would shift management’s focus away from the annual bonus and toward the long-term prosperity of the company, thereby encouraging prudent risk-taking by executives. Companies that have questions on how to design effective variable pay plans should seek the advice from a knowledgeable compensation consultant.

A dollop of rationality can go a long way toward keeping you and your company away from embarrassing news headlines.