SIGNING BONUSES FOR CEOS BECOMING MORE COMMON

When a chief executive takes on a new position, the move can be fraught with risk. In some situations, the fit may not be quite right and, in others, the circumstances of the company may not be what was expected. In recent years, companies have begun to recognize that top executives face significant challenges when moving into new roles and, for this reason, an increasing number of employers have begun to offer substantial signing bonuses. It is important to keep these bonuses, sometimes known as “golden hellos,” in mind when negotiating a competitive compensation package.From a corporation’s perspective, offering a generous signing bonus for new chief executive officers just makes sense. First, signing bonuses are essential because they cover the compensation that executives are leaving behind when moving to a new company. Second, even though hiring a new CEO from outside the company costs approximately one third more than hiring from within, the bonus is a smart investment because the company is getting someone who is a known commodity. This is particularly important because it ensures as smooth a transition as possible.

Of course, when a new CEO accepts a large signing bonus, companies and shareholders alike expect results. In the past couple years, shareholders and experts in executive compensation have begun to question whether golden hellos are good policy. In some situations, offering these bonuses can hurt a company. For example, in 2011, J.C. Penney lured Ron Johnson from Apple with a $52.7 million signing bonus. Just 17 months later, after J.C. Penney’s stock dropped nearly 50 percent, the company fired Johnson. Some suggest that J.C. Penney’s experience with Johnson proves that large signing bonuses are bad for companies and bad for investors.

There are, however, cases where a large signing bonus has proven to be a good investment. Best Buy, for example, recently hired Hubert Joly as CEO in 2012 and paid him a bonus of approximately $13 million. Since Joly was hired, the price of Best Buy’s stock has nearly doubled. Currently, it appears that paying Joly a large, up-front bonus was a good move by Best Buy’s compensation committee.

If you are an executive currently considering making a move to a new company, consider speaking to an experienced executive compensation attorney. An experienced attorney can provide essential guidance in the negotiation of compensation and benefits packages and can help ensure that your short- and long-term interests are protected. For more information, contact an attorney today.