CFO Magazine

Incentive Confrontation

A bitter dispute over bonuses highlights the hazards of incentive pay.

Tim Reason
CFO Magazine

January 1, 2003

One day in November 2001, Corey White showed up for work wearing a sweater. That wasn't unusual, as autumn had turned cooler in Atlanta — home to Idea Integration Corp., the E-business consulting unit of MPS Group Inc. and White's employer. But the senior manager wore the sweater for a different reason: to conceal the microphone wire that ran from his arm to a digital recorder in his trouser pocket.

What did he intend to record? Back in August, White had begun asking his managers to pay overdue second-quarter bonuses for the seven consultants on his staff. But in late September, an E-mail to White from Idea senior vice president Ray Smith denied, oddly, that the company's bonus plan was "ever sanctioned by Idea management" — even though White's consultants had already received bonuses for the first quarter of 2001. Instead, Smith offered White's staff a "50 percent settlement." The next day, after some consultants threatened to leave, Smith backed down and agreed to pay in full.

But White, a highly paid consultant who joined Idea in October 2000 after working for KPMG Consulting, had no such luck securing his own bonuses, which he says were earned fair and square. He claims he heard a remarkable variety of official procrastination and justification over the next two months, but the underlying message was clear to him: White's bonuses were simply too big, and the struggling E-business unit didn't want to pay them. Frustrated, White began recording his meetings with his managers. He says he wasn't initially contemplating legal action, but simply trying to document the company's unfair behavior.

But after White left Idea Integration in March 2002, he did file suit against the company for fraud and breach of employment contract. His original complaint seeks an award of $120,620 in unpaid bonuses and an additional $53,000 for the estimated value of stock options he says were promised to him but never granted. That total award could be more than tripled if he prevails on all counts, since part of his suit includes charges made under Georgia's version of the Racketeer Influenced and Corrupt Organizations (RICO) statute.

Refusing to pay incentive compensation, White says, was a regular practice in Idea's Atlanta office, hence the RICO charge. CFO was able to identify six other former employees, all reporting to the same office, who claimed that their incentive plans were changed after they earned most or all of their incentive pay, or that earned bonuses were withheld after they left the company.

Not surprisingly, Idea is disputing the matter. "We are confident and expect that Idea will be vindicated," says Tyra Tutor, an MPS Group vice president. "I can't specifically discuss this case, except to say that a senior vice president personally met with Mr. White to address his concerns, but he was unwilling to accept a realistic resolution. Idea has hundreds of employees on incentive-based compensation plans, and over the years we have had thousands of employees on incentive-based compensation plans with only a few complaints. I think our statistics show that this is very much an isolated event."

The validity of the charges and countercharges remains to be determined in court, with the case tentatively scheduled to begin later this month. Lawyers for both sides refused to comment on the case. But White's recordings, which he provided to ,i>CFO, along with depositions from the suit, illustrate the confusion and even damage that incentive pay plans can cause.

Cash-based incentive pay plans are supposed to accomplish two major goals. One, obviously, is to motivate employees. The other is to turn a corporation's largest single fixed cost — payroll — into a partly variable cost that can float up and down with the fortunes of the business. It is well established that such plans often fail at the first task if they are too vague. Now, as the economy continues to stumble and companies look to cut costs, cash-based incentive plans may be failing their other task as well, particularly if the connection between individual performance and company results was poorly defined during happier economic times, or if the plans are poorly managed.

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