Bausch & Lomb has lowered the bar its employees have to clear to cash in on the eye-care product maker’s annual incentive plan.  Instead of sticking to the original 2006 bonus criteris, B&L will distribute its year-end extras based on sales and cash flow bench-marks.

Then company originally tied the funding of its bonus pool to earnings per share and sales growth, according to a company regulatory filing.
The original incentive plan for the company’s operating units has also been changed.  Instead of benchmarking performance against operating earnings, the revised plan will set performance targets against revised sales and cash flow targets.  Further, the company will fund each unit’s bonus pool as long as each one meets just one of the established performance metrics, according to the filing.

“Before, their goal would have been a percentage of growth over last year’s sales,” explains Pat Haggerty, a principal with executive compensation firm James F. Reda.  “Now, essentially, the comp committee will probably set a sales target it thinks the company can hit.  It’s probably not going to be over what it was last year.”

The Company’s recall of its Renu with Moisture loc Contact lens solution earlier this year prompted the switch.  B&L withdrew the product worldwide because of its link to the risk of fungal eye infections.  That, according to Bausch & Lomb spokesman Meg Graham, made the incentive plan’ original targets “not achievable.”

The level of scrutiny comp plans are under these days makes B&L’s bonus plan change risky.  It raises questions about the integrity of the incentive plan.  Plus, proxy advisors sometimes recommend that investors cast withhold votes against compensation committee directors at companies where pay isn’t aligned with performance.

“Glad it’s not one of my companies,” says Reg Brack, a director at Interpublic Group of Companies and a former chairman and CEO of Time Warner, of the B&L situation.  Brack says heis generally opposed to lowering targets.  “One certainly would not raise them if business conditions improved,” he says.
Anthony Schweiger, a director at Paragon Technologies, a manufacturer of material-handling machinery, agrees.  “Management in this example has to be accountable for the recall,” he says.  “Boards must have the guts to think out short-term and long-term incentive programs that work for shareholders first, and then stick to them.”

But not all bonus plan changes are created equal.  In this case, writes the B&L spokesman in an e-mail, the revisions will help the company “retain and motivate key employees.”  That can be a legitimate reason for changing an incentive plan, compensation consultants say.

“If halfway through the year I looks like (bonus-eligible employees) are not going to make those goals, do they become totally demotivated for the rest of the year?” asks Paul Dorf, managing director of Compensation Resources.  “I think that’s an important consideration."

Haggerty says changing incentive plan criteria often makes sense for retention purposes.  “There are likely going to be shareholder suits and lots of things that will have a negative impact on the company right now.  So one would argue, “No bonus for anybody,” he says.  “I’ve been in enough comp committee meetings to know that’s a tough thing to sell.  Their employees are used to getting a bonus every year, and now, because of this one product, should everybody get zero?”

Company morale is certainly not being helped by the disastrous effect the recall is having on B&L’s earnings.  Last week it issued a warning stating that projected annual earnings before taxes could fall as much as 80% short of original estimates, the Associated Press reports.

Dorf and Haggerty give the eye-care company’s comp committee credit for funding payouts under the revised plan at 67% of the original funding level.

“They’re reducing the payout be a third,” Haggerty explains.   “They’re capping the upside to 34%".

According to Dorf, that often didn’t happen in the past.  Reluctant to cut executive bonuses at all, boards often “played with the numbers to the point that they would give out full bonus awards or their equivalents when it really wasn’t appropriate,” he says.

Anna Dopkin, co-chair of T. Rowe Price’s proxy committee, which makes recommendations to the company’s portfolio managers on how they should vote on proxy issues, says, “What investors will really focus on is the pay of the top five people.”

The filing doesn’t give enough details to know exactly how much employees will benefit from the revised criteria, and the B&L spokesman declined to elaborate.  It does, however, state that certain employees may be reclassified under the revised plan so that they are eligible to receive a larger or smaller percentage of their salary as a bonus.

“If and employee’s target award was 10%of her salary, even now that the company is going to fund it at a lower level, if she’s going to receive it at 15% that means she will be getting the same amount she got before,” Dorf explains.  “Even though the size of the pool is smaller, you could be getting a bigger percentage”.

The filing specifies that “this change has no impact on the classification of any named executive officers.”  That, according to Dorf, means the company’s top five executives necessarily will take a hit.  The most they will receive is 34% of the bonus they were eligible for under the old plan.