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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.
"As more and more of employees' total compensation packages are tied to variable comp, you are likely to see more of these disputes [like White's] arise," predicts David Spaulding, an attorney in the employee benefits practice at Denver-based law firm Rothgerber Johnson & Lyons.
A Very Bad Year
The seeds of White's dispute lay partly in the organization of MPS Group, a provider of temporary staffing services. The company, which recorded revenues of $1.55 billion in 2001, grew through a series of acquisitions in the late 1990s, and, like many rollups, resembles a series of loosely connected small companies. "The whole integration of the company was completely disorganized," asserts White's first manager, Cash Menicke. "I think that's why you see a lot of 'jungle rules' going on in the compensation area." (Menicke left shortly after White was hired and says that he signed a severance agreement forgoing any claims for his bonus, out of fear that his reimbursements for expenses and unused vacation time would be held up if he refused.)
During White's tenure, incentive pay wasn't managed centrally — or even by business unit. Individual office managers "did have authority to execute compensation plans for their direct reports," confirms Tutor. "Since then, and unrelated to this case, we have shifted from the individual practice leaders having the authority to execute individualized compensation plans. The company [Idea Integration] as a whole now has an overall and consistent incentive plan."
White, who managed the PeopleSoft consulting practice at Idea Integration, says the payout of his bonus plan — approved by Idea executives and similar to his staff's plans — depended solely on meeting personal performance goals. Those goals included revenue targets and business development, but not Idea's profitability. Larry Reissman of Hay Group, a Boston-based compensation consulting firm, says it's common for companies to focus on revenues when designing incentive plans during a start-up phase.
But as the business grows, Reissman adds, companies need to change their plans to emphasize profitability rather than growth. "Where companies get in trouble is if they don't manage the compensation system," he says. Idea, at one point intended to be spun off via an initial public offering, was already in trouble when White began pressing his case, and it showed in a constant reshuffling of management throughout 2001. Indeed, James Albert, the senior vice president who tried to resolve White's case in 2002, admits to White in one of his recordings that "with the changes in management...it does look like at least for some period of time, the ball got dropped...."
White, however, sees more of a pattern. He and five other former employees who claim they are owed bonus money worked under Patrick J. McCall, and several insist McCall was the executive who ultimately blocked their payments. McCall was managing director of Idea's Atlanta office during the second quarter of 2001, when Idea as a whole recorded a $7.1 million loss under income from operations. (Other E-business consultancies were swooning at the time, thanks to the deflation of the Internet bubble.) That was the primary cause of an overall year-over-year decline in second-quarter income from operations at MPS Group of 64.6 percent, which, say ex-employees, put McCall's unit under tremendous pressure. A large number of consultants were laid off that quarter, and the following quarter Idea lost $7.5 million. Under those circumstances, it's easy to see why management expected White to share the hit.
McCall referred all questions to MPS Group's Tutor. But when asked in his deposition why White had not been paid, he replied, "You know, in every comp plan, there's their interpretation and there's their manager's interpretation. And I think it says in there that, you know, it's not absolute." In his deposition, McCall questioned White's performance as well as his claims.
McCall's boss, Ray Smith, who initially denied payouts to White's staff, claimed in the same September E-mail that White's bonus plan wasn't "management approved," even though White had received partial payment under the plan the first quarter. However, White's immediate boss, Scott Salter, suggested in a conversation secretly taped by White in November that management was horrified by the cost of White's accumulated bonuses as business dropped off, and balked at paying his bonus because the former Big Five consultant was "the highest-paid practice leader in the company in terms of base pay" and was already owed more than $100,000 in bonuses.
"No one wants to get near these plans," Salter told White. "I think they just want them to go away, and they want next year to come so we can create a new plan." (Salter has since left the company.)
"I Didn't Write the Plan"
White maintains that Idea's overall performance was irrelevant to his bonus. Not only did he meet his plan's performance metrics, he states, but revenue for his PeopleSoft practice grew 22 percent and profitability increased 211 percent in the second quarter of 2001. Therefore, he argues, there was no reason to deny him his incentive pay.
In January 2002, Albert was brought in by Salter to adjudicate White's claims, now for all four quarters of 2001. On January 18, a meeting was held in Salter's office with White. Albert attended it via speakerphone. Once again, White wore a sweater and, underneath, his concealed recorder.
Albert asserted that White's plan had been changed in the second quarter of 2001. In a heated exchange recorded by White, Albert said: "I'm just staggered that you would think in an office that lost $2.5 million that you...would be independent of that.... Your expectation is that independent of office profitability and company profitability, you think you should make all this money."
"I didn't write the plan, Jim," responded White, noting that profitability was not one of his plan's metrics.
"But the plan also says the plan can be changed at management discretion," countered Albert.
"But it never was," said White, who steadfastly denies ever receiving a new plan or any notice that his existing one had changed.
White's plan did include one sentence that noted, "if business conditions warrant, this plan is subject to change at management discretion." But that clause, by itself, is ambiguous, contends attorney James Eccleston of Chicago-based Shaheen, Novoselsky, Staat & Filipowski PC. Eccleston says such ambiguities are typically interpreted against the drafter of the contract.
Attorney Spaulding, by contrast, argues that "if the employer reserves the right to amend the plan any time prior to the bonus being vested or earned, then the employer has that right." However, he adds, "when the employee has a vested right in the bonus, at that point the employer may not change the amount or the criteria upon which the amount was calculated." White claims he had met all of his performance targets for the third quarter by September 20 — the first time management claimed his plan did not exist, he says.
In a series of subsequent recorded conversations, Albert continued to insist White's plan had been canceled, and that he was owed nothing more than he had already received. But he reviewed White's performance metrics anyway, concluding that White's performance was poor and even "if the plan existed," White would be owed at best just a third, or $42,417, of what he claimed. He then offered a $20,000 settlement, which White refused.
White says he learned indirectly in March that his position as PeopleSoft practice leader had been eliminated. Salter told him he would henceforth be a full-time billable consultant, but was expected to continue "doing non-billable activities that are beneficial for the PeopleSoft practice." White left Idea Integration that day — he says he was effectively fired, the company says he abandoned his job — and filed suit shortly thereafter.
Handle with Care
One reason managers tinker with incentive plans could be that employees typically don't sue. Many sign agreements when hired that say they will submit claims against the company to arbitration — a process that limits their legal resources. "The deposition practice is extremely limited in the arbitration," notes attorney Eccleston.
Confusion between incentive plans and discretionary awards also dissuades employees. "The average employee doesn't know if he has an incentive plan or a discretionary plan," asserts Peter LeBlanc, senior vice president in the Raleigh, North Carolina, office of Sibson Consulting. Adds Eccleston: "There is a mistaken impression among most employees that there is no such thing as a good bonus claim."
Even more common is when employees decide that the amount of the claim isn't worth the effort. One former senior manager at Idea who was hired around the same time as White claims MPS owes him $6,652 in bonus pay, but says the amount simply wasn't worth fighting for. "It would have required spending $2,000 to $3,000 more than what I was owed," says the manager, who spoke on condition of anonymity.
The fact that White did sue illustrates a key point: As incentive pay is used beyond traditional areas such as sales, companies must include detailed, specific triggers in their plans if they want compensation to vary in response to company performance changes. "These plans very much turn on the terms of the plan as drafted," says Spaulding. "That's important for employers to know because often either these plans are not put down very clearly in writing, or they are not very clearly communicated to employees."
Indeed, at least one study suggests that companies generally handle employee cash bonus plans with far less care than contracts with vendors or customers. For their part, by contrast, employees at Idea Integration kept tabs on their plans: one former consultant says "all" Idea consultants tracked their bonus compensation metrics on Excel spreadsheets they designed and managed themselves.
Asked if Idea's management ever altered the plans while they were in effect, former business development manager Ray Hammons answered in a deposition that it did so "[p]retty much at will. Whenever they decided that, I guess, people were making too much money. Then they tended to modify that individual's or that whole group's performance plan, bonus plan."
"Changing compensation plans retroactively or midstream is not our practice," responds Idea's Tutor. At best, however, White's case suggests that Idea's management was overly casual about verbally adjusting compensation plans — even retroactively — without issuing formal updates. Regardless of the finer legal points, altering plans in midstream undermines employee trust in management, say compensation experts. "When these disputes arise, the plan is clearly not working for the company in terms of motivating employees," comments Spaulding. Instead, "it is acting as a drain on morale."
Such casualness about incentive compensation is possible in part because employees are uncomfortable challenging their bosses about a sensitive topic like pay. A survey of compensation practices published by WorldatWork, a not-for-profit association that focuses on employee motivation, compensation, and benefits, indicated that 50 percent of employees felt pay programs were not to be discussed at work. "As a manager, it makes your job easier if employees don't discuss pay amongst themselves," says Paul Mulvey, professor of human-resource management at North Carolina State University in Raleigh and a co-author of the study, "because if you make any mistakes, you may suffer fewer negative consequences."
Of course, that also assumes that employees aren't wearing a wire.
Tim Reason is a staff writer at CFO.
Corey White is not alone in claiming that Idea Integration Corp. shortchanged him. White's first manager, Cash Menicke, says he forfeited a $25,000 bonus when he was laid off. Also, a former Idea sales executive who requested anonymity claims he was laid off with $198,188 in incentive pay and unreimbursed expenses of $14,404 outstanding.
Sheri Jennings, former senior business development manager, wasn't laid off, but says her compensation plan was changed unexpectedly halfway through a lucrative project. "It was basically, like, we think you've made enough now," she says. "I did the math and remember thinking it cost me roughly $100,000." That was also the case with a former senior manager — hired about the same time as White — who claims his incentive pay was arbitrarily halved midway through a quarter, depriving him of $6,652.
All of these employees, except for Menicke, worked under the Atlanta office managing director, Patrick J. McCall, who White and the former executive say was responsible for a pattern of withholding or denying payment.
"I would love to investigate each of these stories," responds MPS Group vice president Tyra Tutor, noting that only White has actually filed suit. "It is frustrating that they can make these statements without providing any documents to prove that [they are] true."
Two other ex-employees, however, made similar statements under oath in depositions for White's lawsuit. Senior manager Toni Lyons, whom White replaced, testified that Idea regularly underpaid her. "Invariably, the amount I calculated was never the amount my practice director calculated.... I can tell you with certainty that over the course of a year's period of time [the shortfall] was probably in...the [$50,000] to $60,000 range."
Former business development manager Ray Hammons was fired a year before White was hired, but echoed White's claims in his deposition. "The way that bonus plan was administered was an absolute nightmare and a joke," said Hammons, who has never spoken to White. "Basically, Pat McCall would decide whether or not and how much to give you. It didn't pertain to anything regarding the plan."
Hammons said he was fired because he challenged McCall and another company executive for taking a group of employees, including several women, to a New Orleans strip club during a PeopleSoft conference in October 1999. He claimed that he, too, had trouble obtaining his overdue bonuses through McCall. He ultimately managed to collect most of what he was owed after he contacted Idea Integration CEO Tim Payne (now MPS Group's CEO).
Payne was "pretty upset" about the strip-club incident, Hammons recalled. Payne fired the executive responsible, and Hammons subsequently received $14,500 in outstanding bonuses and an additional severance check for $25,000. —T.R.
Why Bonus Plans Fail
A recent study shows that bonus plans often fail to motivate specific employee behavior because they are too nebulous. According to "The Knowledge of Pay Study: E-mails from the Frontline," a 2002 survey published by WorldatWork of more than 6,000 managers and employees at 26 organizations, only 24 percent of employees agree that their cash bonus plans actually change their behavior. Sibson Consulting senior vice president Peter LeBlanc, who conducted the study, thinks that if salespeople and executives (who typically are highly attuned to incentive pay) were excluded from that group, that percentage would drop even further.
Moreover, few employees actually understand how their pay and performance are connected; only 28 percent say they know the size of their bonus "well before it is paid." Indeed, even "right before it is paid," 41 percent of employees do not know the amount. "In other words, there is too much discretion in the eyes of employees," sums up LeBlanc. The only way cash bonus plans work, he adds, is if they are transparent. That means employees must understand exactly how performance — both theirs and the company's — translates into dollars on their paychecks, and they need frequent updates. —T.R.