I. INTRODUCTION

Bonuses are traditionally considered to be a variable, or at-risk, form of compensation, although the amount of risk the executive is subject to depends upon the parameters of the plan. The payment can be subjective or based upon objective criteria. It can be based upon one or more of the following performance measures: accounting earnings, stock price performance, sales, market share, and/or customer satisfaction. The parameters of the plan include the performance measure or measures, the targets or thresholds for payouts, and the form and timing of payout. One of the more interesting measures, and one used to deal with a specific goal, is that of Coca-Cola basing pay, in part, on the achievement of diversity goals. ^[1]

Some bonus plans utilize totally quantitative formulas based solely on accounting performance. Appendix 5.1 provides an example of a bonus provision, an extract from the contract signed by David A. Stonecipher, CEO of the Jefferson-Pilot Corporation, on September 15, 1997. The contract provides for the payment of an annual or short-term bonus, denominated as a percentage of base salary, based solely upon one financial factor, growth in operating earnings per share. The contract has a threshold, which is also known as a lower bound, below which no bonus will be paid. That threshold is 5%. That is, if growth in operating earnings per share is less than 5% no bonus will be paid pursuant to the contract. It also has an upper bound, beyond which increases in growth will not...