Stewardship-Sequenced Payouts: An Innovative Idea for Bonuses

In an intriguing article in the WorldatWork Journal (4th quarter, 2007), Timothy Clark of George Washington University and Balaji Krishnamurthy, CEO of LogiStyle, propose an intriguing model of paying bonuses to employees ("Executive Stewardship Incentives from Innovative Bonus-Payout Methodology"). The concept is based on a much-praised system developed at Planar Systems when Krishnamurthy was the CEO. The concept is simple: bonuses are paid at LogiStyle when shareholder return targets are met. If they are, then bonuses are paid to lower-level employees until their bonus targets have been met. The bonus triggers cascades up through however many layers of the company the company sets, with the CEO getting a bonus only if everyone else's bonus targets are met. To recognize the additional uncertainty, the size of the CEO bonus could be increased over what it might have otherwise been.

The authors argue that this system is more responsible and a lot more credible to rank-and-file employees and shareholders, both of whom might be willing to accept higher payouts to top executives in good years given the fact that nothing is paid until other stakeholders have been paid. In years that do not meet targets, employees at lower levels might get a bonus. Ironically, when Krishnamurthy left Planar, the new executive returned to a conventional bonus systems, despite investor praise for the old one.