Oops. How do I fix incorrectly calculated bonuses?

July 2007

"I just caught a stupid spreadsheet error on this year's executive bonus payouts. Nobody has complained yet (our bonus plan is not exactly intuitive), but some of the errors amount to thousands of dollars both up and down. I know we can't ask for money back on overpayments, but what else would you recommend? I'm really sweating this one."

Mike: There's no graceful way to handle this--a lot of people are going to be ticked off.

Start by bringing your CEO and board up to date on the problem. Make sure this is the only time the problem has occurred, because that will be a natural question. Then immediately cut checks for the underpayments, and hand them to the recipients privately with an explanation. Even though they're getting more money than they expected, some of these managers will be worried that your company's compensation system is "broken." You might want to distribute copies of the bonus calculation spreadsheet at this time so everyone can see that it's working correctly.

The hard part, of course, will be dealing with the managers who have been overpaid. Asking for the money back now is a lost cause--even if you could collect, the negative impact on morale and productivity would be a killer. Instead, explain that you plan to treat the payments as interest-free advances against next year's bonuses (or severance payments, for employees who leave). That way, you'll eventually recover all the overpayments without taking cash out of anyone's pocket.

How do I deal with a misguided bonus plan?

February 2007

"We have a corporate target of 20% revenue growth for next year, and top management has just announced a bonus plan that gives big payouts to division managers who beat this target. That will be easy for the people running our smaller, high-growth groups. However, my division mostly sells legacy products that are huge cash cows but have zero potential for growth. We actually produce most of the company's operating profits, but I'm getting short- changed by the bonus plan. What can I do?"

Mike: Not much.

Of course, you could argue for a bonus calculation that takes into account metrics like cash flow, client retention and annual > renewals. But bear in mind that top management is typically focused on increasing the total value of the company, either measured by the stock price (market capitalization) or by net assets on the balance sheet. From this perspective, a division that doesn't grow its revenues adds very little to the company's total value. So, no bonus.

If revenue growth is out of the question, you might persuade top management to reward major cost-cutting efforts instead. If you can grow your division's operating profits from, say, 20% to 40%, that's pretty much the same contribution as doubling your topline sales. Get your team to brainstorm some ideas for serious expense reduction: Even if there's no immediate bonus, this kind of effort is bound to get attention in the right places.

Are we supposed to pay interns?

December 2006

"Our CEO just hired three college students for a one-semester 'internship.' Now he tells me that we're going to pay them each a small salary (equal to $18,000/year). Huh? I thought interns were expected to work for free in return for on-the-job training. Or am I missing something here?"

Mike: Your CEO is right--it is customary to pay interns a stipend, though typically far less than what you would pay a full time, regular employee. There's also an assumption that you'll provide some meaningful training and work experience. If you're just using interns to fetch coffee and stuff more paper into your filing cabinets, your're not living up to your educational obligations.

If you don't pay interns, you may also have some legal exposure under the Fair Labor Standards Act. The Department of Labor has developed formal rules that determine whether an internship is a training experience or a real job. Check out this Web site: http://internships.about.com/gi/dynamic/offsite.htm? site=http://www.pacific.edu/esb/career/employer/fairstandardsact.html

Why would anyone work for a sub-par salary?

November 2006

"I've been reviewing salary surveys to benchmark our senior management comp plans, and I can't help wondering why *anyone* would work for a salary that's well below market averages. It seems insulting, demotivating, and unrealistic. Or is there a hidden factor--stock options? lower stress?--that I don't see here?"

Mike: There are a lot of reasons (after all, not everyone can earn an "above average" salary), but I often see talented executives who work for below-market pay at early-stage, unfunded companies. Clearly, they're betting that a big financial win will make up for less current cash.

However, that doesn't mean that a handful of stock options is all it takes to offset skimpy paychecks. To motivate people to join your company you also need to offer a total package--a breakthrough product, an outstanding team, and a minimum of risk (which usually means there's adequate money in the bank). If you fall short in any of these areas, watch those salary surveys closely. Like it or not, you're in a bidding war with every other company that's recruiting solid management.