Retention bonuses help during time of crisis: Experts

Scandal-plagued SNC-Lavalin gave them out in 2012
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 05/06/2013

SNC-Lavalin has been prolific in the news over the last year or so, plagued by RCMP investigations and allegations of fraud and bribery, along with the arrests of former senior executives, including its CEO.

But in its March 11, 2013, proxy management circular, the 34,000-employee engineering and construction firm revealed that “in light of all the changes that took place in 2012,” it handed out awards as retention measures to certain members of management and key employees.

The theory is that an employer needs to keep a team in place through a critical period, said Christopher Chen, national director of executive compensation at Hay Group in Toronto, who recalls an executive group in 2008-09 that wasn’t supposed to receive any payouts from their share award programs, but the board decided to give bonuses anyway.

“It was all about retention. The argument then was: ‘Well, when this is all over… we’re going to need people in their seats who are experienced and are going to be able to push the organization forward,” he said.

And these days, companies have to disclose pretty much everything they pay top executives, said Chen, who tells clients: “If you’ve done your due diligence, done your analysis and feel it’s reasonable and you can defend yourself on the front page of a national paper, then you do what you need to do as a business — but know that it’s going to attract attention.”

SNC-Lavalin guaranteed that if budgeted financial targets were not met, employees participating in the management incentive program (MIP) would receive one-third of the target bonus (representing 50 per cent of the financial component), and if they met expectations on their individual performance, they also received one-third of their target bonus. So they received a minimum of two-thirds of their target bonus for 2012.

They were also given a special cash bonus equivalent to one-half of their 2012 MIP target, representing $15.3 million.

In addition, 47 key employees received restricted stock-unit (RSU) grants at a value of 50 per cent of their annual base salary, while eight key employees received a cash award equal to one-half of their salary.

“These measures were considered successful as no key employees left the corporation since receiving the cash awards or RSU grants,” said Montreal-based SNC-Lavalin.

Saving a ‘sinking ship’

Typically, retention bonuses are used when a company is going through some kind of transition, so it wants employees to stay and help it through the process, said Will Cascadden, an employment and labour relations lawyer at Spectrum HR Law in Calgary. But they are also used when a company is in difficulty and concerned people are going to leave a “sinking ship.”

“The good part about that is that it may ensure that people stay. The bad part is if the company is actually in a difficult situation, paying extra money to keep existing employees may not help that situation — but I guess that’s a business decision as opposed to a legal one. Generally, if they’re doing the proper analysis, they’ll do a cost benefit of ‘Are we better off paying retention bonuses and keeping most of our people or are we better off not doing that and hoping some stay?’”

Companies have to find a balance between an adequate level of security and incentive and an appropriate distribution of cash for purposes such as this, said Richard Smith, a partner at Burnet, Duckworth & Palmer in Calgary.

“Given the world of the disclosure that we all face now, it’s imperative, quite frankly, one, that people look at it and scrutinize it the way they do and, secondly, that the board recognizes this is not an opportunity to glad-hand money out to their friends or close associates but to recognize they’ve got to do it with a fair degree of assessment and scrutiny, and to do it right.”

While a well-run organization will have performance-driven goals and incentives that form the framework for compensation or reward, this is different, said Smith.

“This is focused almost entirely on... a need in a time of crisis to make sure that people have something that is real, tangible, usually unconditional and once the particular time frame has elapsed, it’s in their hands.”

Targeting the bonuses can be very tricky, subjective and difficult to rationalize, he said. But it’s likely SNC-Lavalin has a well-articulated plan laid out in terms of the criteria used to determine who should receive the bonuses, so it would “not be later accused of arbitrarily throwing cash, unilaterally, and without good rationalization, out the door,” said Smith.

Choosing employees can never be done perfectly, said Cascadden, and there is the possibility of discrimination if, for example, a company with a group of five engineers gives bonuses to three who are in their 40s and none to the two engineers in their 60s.

But the selection of employees is not that contentious, said Chen. It’s usually pretty inclusive of the management team and often goes down a level or two to make sure everyone’s on the same page.

“If you provide these bonuses to just the top three or four people and the next one or two levels down realize they’re not getting (it) — and, let’s be honest, they’re doing a lot of heavy blocking and tackling on the operations side — that’s potentially a dichotomy which may cause some rifts within the team itself.

“So it’s not that difficult to figure out who needs to be kept. Try to keep the management team en masse.”

But there can be consequences when it comes to those not selected, he said.

“There’s always that risk that retention bonuses create almost a… first- and second- class tier of employees. That’s taken away if you have the seniority issue — it’s just the management team, there’s already a first and second class there.”

And if employees sit tight and the company recovers, the board directors look like geniuses, said Chen.

“If it doesn’t, they have to own and wear that… there’s no right or wrong answer to this one.”

Add Comment

  • *
  • *
  • *
  • *