We've posted before about Exec bonuses and the issues that they can create.  We have all seen the headlines where Execs get massive bonus payments while everyone else is seeing pay freezes, or there the bonus is given even as the Exec heads out the door.    These stories can leave a bad taste in the mouths of your stakeholders and make staff feel totally disrespected.

So how do you get it right?  You want or need to pay bonuses in order to remain competitive, but somehow you have the feeling that it carries a huge risk.

Our advice would be think carefully and ensure your bonus scheme is constructed with the following in mind:

• Short term bonuses will support short term goals and probably drive short term behaviour.  Long term schemes (eg. LTIPS) should be exactly that and should aim to tie your Exec in to the long term plan activities.

• It doesn't matter if it's an annual bonus or an LTIP - ensure that it ties in very closely to your strategic goals.  Whatever your targets are, they should be set with the strategy in mind - clear line of sight to the strategy and small (or large steps) on the way to achievement of these goals.

• Make sure your targets (especially financial and other ratios) are clearly defined and understood by both recipients and Remco/the Board.

• Put in achievement hurdles - be clear about the minimum that has to be achieved before a bonus will pay out at all.  Make it clear that if these hurdles are not achieved there will be no payout, partial or otherwise.
   
• Make the payout proportionate - how would you feel if the company you worked for saw a 5% increase in profit, you got a 3% pay award and your CEO got a 50% bonus?  Check the sums.  If it feels extortionate to you, it probably looks extortionate to every one else.

• Make it clear, if you can, that the bonus will not pay out if the Exec brings the business into disrepute.

• Take legal advice to ensure that your bonus is watertight and has no hidden pitfalls.

You do need to be brave in the current climate, but be brave with good back up.