Project-based compensation is latest trend in employee retention

Aug. 1, 2001


The executive talent pool in the telecommunications component and equipment industries is distinctly limited. The desired profile of a senior-level executive in fiber-optics, photonics, or semiconductor companies is someone with a Ph.D. in electrical engineering or physics who also has extensive experience managing teams of 50 people or more.

The people fitting this high profile are in great demand and virtually irreplaceable if they were to leave in the midst of a project with make-or-break impact on a company's future. The importance of these executives is forcing the industry to come up with new strategies for retention.

Traditionally, stock options and other equity incentives kept valuable executives tied to their companies-at least until the options vested or a substantial market developed for the stock. The market downturn of the past year, however, has dimmed the luster of stock options and their value as a retention tool.

At the same time, companies are under tremendous pressure to deliver technology solutions that will drive a competitive advantage and a faster track to revenue and profitability. The stakes are enormous, and nothing can derail a mission-critical project like the sudden departure of executives responsible for getting products to market. With the diminishing appeal of stock options, employers, by necessity, are turning to pay-me-now incentives to retain their best executives.

One retention tool being used with increasing frequency during the past year is the project-based cash bonus. Bonuses range from $5,000 per month in smaller private companies to $10,000 per month in mid-cap public companies. Most often for vice presidents of engineering and product development, these bonuses generally kick in six months before the end of the project, contingent upon successful culmination or product release. In the semiconductor and optical components markets, we're seeing mid-sized companies use the project bonus as a defensive strategy against industry giants raiding the market for talent. Smaller companies are often helpless against the resources of companies like Nortel Networks (Brampton, ON) and Cisco Systems (San Jose, CA), but the cash bonus plan is one compelling equalizer because of its immediate return to the employee.

One downside of this trend, of course, is that the cash bonuses take a much bigger bite out of a company's cash flow than stock options, which have no effect on cash flow when granted. Now that many technology companies are dealing with significant cash crunches or trying to secure new financing, cash bonus awards may not be feasible for everyone.

Another problem is that cash bonuses may be a temporary fix. An executive who stays for the completion of a project-and the obvious cash advantage-may not remain committed if the firm can't move quickly to the next challenging project and accompanying cash incentives. The flush of success that follows a firm's achievement of first-mover position with strategic new technology has to be followed by sustainable corporate performance.

The only other potential issue is psychological. The purpose of any incentive is to intensify focus on a certain objective-a good thing unless the single-mindedness turns into tunnel vision. An executive focused intently on delivering a project could potentially cause conflict by driving people too hard or refusing to listen when legitimate delays or technical problems could threaten a completion date. Project-mindedness could become a negative if it detracts from other important aspects of an executive's role, from awareness of changing market conditions to departmental or organizational problems that can't wait to be addressed.

Avoiding the pitfalls is largely a matter of leadership quality. As powerful a driver as money is, the best executives won't sacrifice their responsibility to do the right thing for their company, even if means scuttling a project or redesigning it. As important as it is to gain the design win for a first-to-market product, the best win is the one that sticks-the one that has been carefully conceived, thoroughly tested, and flawlessly executed.

The upfront costs may hurt, but the long-term costs associated with losing key executives are far greater. Today, it takes 1.7 times an annual salary of an executive to find a replacement. With executive salaries in the communications industry at $160,000 to $220,000, short-term cash bonuses of $10,000 per month to assure a successful product launch are a relative bargain.

Shawn Oglesbee is managing director for semiconductors and photonics at Christian & Timbers (Cleveland). He can be reached via the company's Website,

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