Onami

Sorry for the off topic post...but I need some help please and figured someone on the board would have past experience. I have a performance bonus at work based on profitability. The hurdles and payouts were set last January before all of the currency issues developed. We had pegged our dollar at $1.15 (we do a lot of US business) and worked our budget out with this factor. We have had a great year at this budgeted figure and I have exceeded my profit target. However, when we take the exchange rate into account (we show this below the operating income line), we still did much better than last year, but we have not met the hurdle where my bonus begins. For example (with fictitious numbers). If our operating income is $1 million or more, I earn a 2% of operating income back to dollar one. So, we have made $1.5 million at the budgeted exchange rate of $1.15 and would be eligible for a $30,000 bonus. However, when we take real exchange rates into account, our operating income is only $750,000 and therefore I get no bonus.

Does anyone one have any experience with this? What is standard protocol in these types of situations? Any advice for my discussion with the boss???

Thanks in advance!

PPo

If the dollar went the other way, and the company made more money, would you get a bigger bonus?

I always negotiate the fluctuation of the currency into the performance based payouts up front. This way both the company and individual understand the risk. This sounds like a messy situation and my advice would be to take the hit and negotiate your bonus next year to be protected from currency fluctuations regardless of the swing...

Turbodan

was the bonus based on the fictitous 1 million US or CDN? that is all that matters. I agree with PPOs comments. Negotiate based on CDN dollars to protect yourself. IMHO the CDN is not going to drop much more over the next year.
Another option for future is to use the futures market (or options) to hedge (either for the company or you personally). that way whatever the currency does you break even based on the exchange rate at the time you book it.
if you are interested in hedging, I can advise you on some options, pm me.

Onami

Thanks guys. I just joined this company last year and this is the first time that I have been given a percentage of profits, so this is new territory for me. Profit is stated in CDN dollars, as is my bonus hurdle etc. The challenge is where the exchange is applied - above or below the operating income line - and the fact that we have never had a year with such a wild currency fluctuation. I will certainly firm this up for next year, but I still need to negotiate a fair arrangement for this year...

Turbodan

If the profit is stated in CDN and the negotiated bonus hurdle is CDN then apply the rate and convert to CDN and figure if you hit the bonus or not. when it comes to currency fluctuations expect the unexpected and don't leave yourself naked...or cover your ***.
Now work harder and take some of that cheap US $ and get a tt already!

PPo

Mark,

Keep in mind that your bonus needs to be justified by the PnL statements. The suggestion to hedge against currency fluctuation is great idea and would be smart planning for the company depending on the gross revenue and the revenue allocation by currency. Another thing to consider is to build a multi-year smoothing reserve for performance based incentive to protect the individual in the company from large currency fluctuations over many years. The smoothing reserves can get complicated to engage with but the net effect is happy and motivated employees...

Good Luck!
-Patrick

Onami

Thanks again Guys. Just bought another muscle car today Dan, so the TT is going to have to wait a while longer.

Patrick. They brought me into the company last November to turn things around. Using the budgeted exchange rate which allows us to compare to last year, we are on target to increase operatiing income by about 450% in just one year! So there is no doubt about my contribution and my bonus would be "substantial" to say the least. My problem is that no one expected the exchange situation this year and this cost us about 50% of our profit after conversion. So, when we use the "real" numbers, I just miss my profit hurdle and get $0 for this component of my compensation plan. I am confident that we can negotiate something in this regard, but I would like to go into these talks "armed" with examples of how other companies handle this situation. We did some hedging this summer, but again, our no one thought the CDN dollar would appreciate so quickly.

Thanks again guys!

Ronan

Not sure you have a lot of leverage. If bonus is based on profitability,not operating income,then currency fluctuations are part of the deal. I would certainly try to negotiate something but depends on the precise wording of the bonus deal. About fifteen years ago I missed a bonus because the target was not met..due to the accrual for bonuses!. Evidently this was part of the P and L, and the company made its external targets by not paying the bonuses to the execs. It was frustrating.