Negotiating Your Executive Bonus Structure to Maximize Your Compensation

By Robert A. Adelson

As a VP, C-level, or senior executive, negotiating your executive bonus structure is an important aspect of maximizing your total compensation package. Whether you’re negotiating a sign-on bonus, your annual bonus, performance or contingency bonus, or any other bonus agreement or understanding, your knowledge and mastery of the nuances of bonus agreements is an important part of securing four yourself the best possible deal and the level of compensation you earn in your position.

Executive bonuses often come in different forms, each serving a unique purpose within your compensation package.  This article will discuss and offer structuring tips, strategies, and things to watch out for in your negotiations over the sign-on bonus, the guaranteed bonus, the annual bonus, and special performance or contingency bonuses.

 

👉 Why a Starting Bonus Matters

Starting bonuses or sign-on bonuses can be the initial step in building a comprehensive executive bonus agreement. These bonuses compensate for forfeited earnings or equity from a previous role and can act as an incentive to accept a position. 

Companies often design executive compensation packages with vesting schedules, ensuring that executives must remain with the company to fully earn the associated benefits. These arrangements, commonly referred to as “golden handcuffs,” can create a financial hurdle for executives considering a transition. Thus, if you decide to leave for a new opportunity, you may well face forfeiting all or an important part of your employee equity that is on the brink of vesting. Similarly, a new job offer might arise just before you become eligible for a significant bonus at your current company.

To address these potential losses, you should negotiate for a signing bonus from the new employer. This bonus serves to “make you whole” by compensating for the forfeited benefits, effectively serving as “golden keys” to unlock the constraints of the golden handcuffs and enable a smooth career transition. This bonus is typically in the form of cash.

Taking a new executive role also means leaving behind stability to start fresh, with the risk that the position may not work out. This justifies an alternative or second signing bonus.  This “movement bonus” can also take the form of cash.  But often, too, it can be in equity, with a short vesting period.

For both a “make-whole” and a “movement” signing bonus, the company is likely to make its own demand of commitment from you.  This commitment called a “claw back,” typically would require you to pay back the starting bonus if you leave the company after an insufficient duration.  Clawback terms are important and negotiable, including its length in time, a portion of the bonus subject to clawback, terms of payback, the manner of leaving requiring clawback, and other terms. 

 

👉 The Role of Guaranteed Bonuses in Your Package

A guaranteed bonus provides certainty and stability, often in the first year or two of employment. This type of bonus can be a fixed amount or a fixed percentage of base pay.   This guaranteed bonus would be paid regardless of external factors that might affect company performance. For many executives, guaranteed bonuses are a way to mitigate the risks of taking on a new position, particularly in organizations undergoing change or growth.

The guaranteed bonus is especially useful to cover a period of training and adjustment as you grow into the new position.  It is also helpful if you are hired mid-year or late in the year, too late to set plans and targets for a full year. 

On the other hand, guaranteed bonuses normally have basic performance criteria, such as requiring you to be employed by the company throughout the bonus period. This provides the company an option to withhold the bonus if you are terminated or resign before the period ends. For this reason, the terms governing a guaranteed bonus should be carefully reviewed.

A guaranteed bonus often serves as an alternative to a higher base salary, which can benefit the company by keeping base pay at a modest level. This approach allows the company to maintain salary benchmarks while still offering competitive compensation for valued executives.

 

👉 Maximizing Your Annual Performance Bonuses

The annual bonus or performance bonus is both the most common bonus expected in an executive compensation package and also typically the most significant of the bonuses provided. 

If you are CEO, President, or COO, the performance part of your annual bonus is typically tied to specific company or organization goals.  Common metrics include EBITDA, profitability, or revenue. For life sciences executives, the company’s profitability may be years away, targets often focus on milestones such as advancements in product development or other indicators of increasing company valuation.

If you are the Chief Marketing Officer, the Chief Technology Officer, the CFO, or another C-level officer with a specific focus or a Division Head or Departmental VP, your bonus may be tied to the performance of your area or department, such as market expansion, operational improvements, or technology advances.  For these executives, there are often different criteria for the bonus, some company performance and others individual performance of your area, department, or personal focus.  

While these bonuses offer significant earning potential, the key to maximizing their value lies in setting realistic and clearly defined metrics, fair evaluation, and payment terms.  What constitutes a “successful year” varies by organization.   

A well-structured performance bonus agreement aligns your incentives with the company’s success while safeguarding against unrealistic expectations.

 

👉 Special and Contingency Bonuses

The last type of bonus mentioned in this article is the special or contingency bonus.  This bonus is different than the others in that it is tied to a special event.  It is often contingency in that the event may or may not occur. 

The event is often a liquidity event – the acquisition of the company or the closing of an IPO.  It might also be FDA approval of a drug or other significant company event that may be years in the making.   The event is also often called a “success event.”

With a special or contingency bonus, important areas for negotiation are the definition of the special success event, the timing of your payment, and also clawback terms.   For this type of bonus, it is you, the executive, who needs to seek the clawback terms.  If your employment terminates prior to the success event, depending on how close that event is to your termination, you ought to have a right to claw back a portion of what bonus you would have been paid had the success event occurred “on your watch.” 

 

👉 Why You Need an Executive Bonus Agreement

Executive bonus terms that set out the parties’ agreement formalize the terms of your bonuses, preventing misunderstandings and disputes down the line. It must clearly outline specific formulas or mechanisms to calculate and disburse bonuses, avoiding vague phrases like “at the sole discretion of the company.” or “the sole discretion of the CEO.”  If the targets for a bonus are to be set by the CEO or Board, these should be defined early in the year, giving you a clear understanding of their objectives.  You should know what the goalposts are for your performance, and the company should not be permitted by contract to change those goalposts at its discretion.

Your executive bonus contract should also address scenarios where bonuses are paid post-year-end, specifying provisions for a payout even if you were terminated without cause before the payment date. This is particularly important to ensure that you are compensated for work completed during your tenure.

Given that bonuses can represent a substantial portion of total compensation, you must ensure the performance criteria are fair, achievable, and tied directly to your contributions. Poorly defined or overly discretionary structures could lead to financial disadvantage, undermining the incentive nature of the bonus​​​.

Properly structuring this agreement ensures you’re protected and compensated fairly, regardless of changes in the company’s circumstances.

 

Seeking Expert Counsel

Negotiating an executive bonus structure can be complex, requiring a clear understanding of compensation trends, legal considerations, and tax implications. By working with an experienced executive compensation lawyer, you can navigate this process with confidence.

Even with counsel, there is no guarantee you will achieve all you seek.  However, by engaging experienced counsel, you will be advised on what is there and what is not there and what ought to be provided to you. Thus, with counsel, you will be in the best position to secure a package that reflects your contributions and long-term goals.  This will enable you to be in the best position to fully discuss your executive bonus structure and fully explore opportunities to enhance your earnings.