No need to pay guaranteed bonuses: other less-suspect alternatives can achieve the desired recruitment and retention objectives.

• Author: Clouser, Bruce
• Position: GUEST COLUMN

THE TALES OF irresponsible corporate behaviors in recent years are familiar by now and have turned the spotlight more intensely than ever on corporate governance. Angry shareholders, more attentive regulators, disenchanted employees, class-action lawsuits, and the investing public have demanded increased vigilance by directors and top managers in the execution of their fiduciary responsibilities. These scandals have also created pressure to strengthen governance practices in order to restore trust in America's corporations and capital markets.

While this wave of reform has led to dramatic changes to all aspects of corporate governance, particular emphasis has been placed on executive compensation. Compensation practices that were once considered standard are now being called into question. Guaranteed bonuses are one such practice drawing increased scrutiny.

Guaranteed bonuses, typically used as a recruitment or retention device, are often intended to offset the loss of compensation from a prior employer, encourage retention, or lure an exceptional candidate away from his or her current employer.

In most cases, the bonus is offered as part of the executive's initial employment agreement and is paid over the first one or two years of service. The bonus may be structured as a guaranteed minimum with upside potential (pursuant to the company's existing plan) or as a predefined dollar amount.

Guaranteed bonuses are particularly prevalent as a recruiting tool when the executive is being hired to turn a struggling company around. Since the executive might perceive an unacceptable level of risk in the first year of a turn-around situation, some form of guaranteed incentive payment--often in the form of guaranteed bonuses for the first year or two of employment--is offered to mitigate this risk and induce the executive to accept the job.

While guaranteed bonuses may serve a legitimate human capital purpose, such as attraction or retention, companies should be cautious about any arrangement that could be construed as a "give-away." Instead, companies should consider alternatives to guaranteed bonuses that achieve the same recruitment or retention objectives but still maintain a link between pay and performance.

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