Credit Suisse and Bank of America both recently announced changes in their annual bonus arrangements. Given the state of the economy and the cash crunch that many business are facing, companies are becoming more creative in the funding of these bonus arrangements – with a greater portion of annual bonuses are being funded in restricted stock or other investment vehicles. While these arrangements can sometimes provide a potential benefits to their recipients, knowing the details is critical. Credit Suisse’s arrangement, for example, offers no upside to the executives and could theoretically (according to the Wall Street Journal) result in lower payouts. Stock grants provide both potential increases and decreases in value, but often such shares are “restricted,” meaning that executives cannot sell these shares if things go bad and deferred stock arrangements can have unintended income tax liabilities associated with them. As bonus arrangements become more complex and creative, executives will need to engage in more planning – financial, cash flow, and income tax – to properly manage their incentive compensation.
David Harmon co-authored this post with Charles Bruder.