Equity Incentives For LLCs: Bonus Plans
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
A bonus plan can be done by any kind of company and is probably the most universally understood employee incentive on both the company side and the employee side. A bonus plan is a way for employees to receive a cash payout either based on performance operationally or based on the company’s exit
The benefit of a bonus plan over some of the other equity incentive plan options is that it’s very simple. Bonus plans don’t require that employees become owners of the company or change their kind of tax reporting and filing status. Bonus plans also don’t require any voting or information rights to the employee. Bonus’ can be discretionary and completely up to the employer or they can have employee or company performance parameters. They can be narrowly tailored to each employee or broadly applied based on company performance.
On of the key considerations is being clear and thoughtful in performance based bonuses. It’s crucial that the language in a bonus plan or bonus provision in an employee agreement be written properly. There are examples of company’s who have mistakenly drafted bonuses that unintentionally get them under water. For instance, not specifying whether a bonus comes from gross proceeds or net proceeds of a sale can leave companies scrambling.
Another consideration for bonus’ is timing of the payment. Bonus’ have to be payable within certain time periods to remain compliant under the tax code. If the timing of payout is not written properly the payment can run afoul of the internal revenue code. One of the most common violations (and one of the hardest to remedy) is section 409A of the tax code. Section 409A, if not navigated properly, can be a trap for young companies and can be timely and costly to fix.
A final consideration for bonus plans is setting targets that allow employees to achieve daily targets and also incentivize the overall mission of the business. Companies want employees to feel invested in the overall success of the business. Employers also want to set targets and bonus’ that feel achievable to employees.
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
A bonus plan can be done by any kind of company and is probably the most universally understood employee incentive on both the company side and the employee side. A bonus plan is a way for employees to receive a cash payout either based on performance operationally or based on the company’s exit
The benefit of a bonus plan over some of the other equity incentive plan options is that it’s very simple. Bonus plans don’t require that employees become owners of the company or change their kind of tax reporting and filing status. Bonus plans also don’t require any voting or information rights to the employee. Bonus’ can be discretionary and completely up to the employer or they can have employee or company performance parameters. They can be narrowly tailored to each employee or broadly applied based on company performance.
On of the key considerations is being clear and thoughtful in performance based bonuses. It’s crucial that the language in a bonus plan or bonus provision in an employee agreement be written properly. There are examples of company’s who have mistakenly drafted bonuses that unintentionally get them under water. For instance, not specifying whether a bonus comes from gross proceeds or net proceeds of a sale can leave companies scrambling.
Another consideration for bonus’ is timing of the payment. Bonus’ have to be payable within certain time periods to remain compliant under the tax code. If the timing of payout is not written properly the payment can run afoul of the internal revenue code. One of the most common violations (and one of the hardest to remedy) is section 409A of the tax code. Section 409A, if not navigated properly, can be a trap for young companies and can be timely and costly to fix.
A final consideration for bonus plans is setting targets that allow employees to achieve daily targets and also incentivize the overall mission of the business. Companies want employees to feel invested in the overall success of the business. Employers also want to set targets and bonus’ that feel achievable to employees.
