Camouflage Compensation

Camouflage compensation is compensation that isn't upfront, or isn't clearly outlined upfront. It's compensation that comes in the form of bonuses, shares, cushy retirement plans, pay-outs when employees leave the company, supplemental executive retirement plans (SERPs)...anything that isn't necessarily cash (or salary).

Sometimes companies offer compensation this way because it costs a bit less...after all, the person might not earn their bonus at all, right? But the other (and more interesting) reason is that it's harder to keep track of because it's not offered upfront.

You might think there isn't anything wrong with offering stocks or bonuses, and you'd be right. But, the risk here is that it rewards bad behavior and discourages transparency in employment.

A 2005 survey of Fannie Mae (titled "Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage") found that this type of structure tended to reward the reporting of high earnings...but didn't take the rewards back if those earnings proved to be incorrectly reported (a nice way to say it...another way would be: a lie).

The report also noted that the posh payouts upon leaving the company encouraged risky behavior (to get the person nudged out), and with the layout of compensation, Fannie Mae was not fully disclosing retirement package value. Fannie Mae being government-sponsored makes this even more concerning. Overall the practice of camouflage compensation has been reviewed more closely (especially since the housing market crash) but is still being done, if at least to a (hopefully) lesser extent than before.