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My company is a privately held consulting firm, headquartered in the U.S., with a U.K. branch. Our U.K. branch is entering its fourth year of operation. The company has a management bonus plan that pays out a percentage of pre-tax profits. The plan pays out monthly, based on the previous month's income level. Currently, we calculate the bonus amount in U.S dollars for each participant in the bonus pool. For the two U.K. managers participating in the bonus pool, we take the U.S. dollar-denominated bonus amount and convert it to pounds, using the month-end exchange rate.
Our two U.K. managers feel they are being shortchanged because of the weakness of the dollar. I would be interested in hearing how other FEI members handle this type of scenario.
Paul Salvucci (salvucci@tscg.biz )
Response:
We measure performance and pay bonuses in local currency. Obviously, if you sell in a currency other than your home base currency, the home base currency amount will fluctuate, but so will profitability and revenue. From a philosophical standpoint, we believe that the bonus should have a line of sight to the performance.
Bill Koch (Bill.Koch@ddiworld.com )
Response:
The U.K. manager bonus plan should be in U.K. currency. The managers create their profits in pounds. The expense is being charged against U.K. income in pounds. There is no reason to convert to U.S. dollars.
Ed Clarke (eclarke3@aol.com )
Response:
We had the same issue with regard to a Canadian participant in our consolidated bonus pool, which is measured in U.S. dollars, although it is slightly different, as we have an annual formula. We start from the perspective that the Canadian dollar earnings are reflected in the pool and the U.S. dollar equivalent of these has gone up (or down) with the strengthening of the Canadian or U.S. dollar. We allocate the bonus pool driven by the business profitability that reflects both accountability and a job value. Job values for Canadian-dollar-based employees are re-weighted based on fluctuations in exchange rates. So if the Canadian dollar gets stronger, the earnings of the Canadian company increase. Although everybody participating in the shared bonus pool wins from the increasing value of the Canadian earnings, the Canadian employees participate to a greater extent in the pool, and this factor goes part of the way toward making them whole on the exchange-rate fluctuation. In effect, you make one impact of the currency-exchange fluctuation offset the other.
Anonymous
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