Performance unit plans (PUPs) make good sense for small businesses. Unlike year-end bonuses, PUPs tie financial rewards to long-term, individual achievements, yet they don't entail prolonged financial obligations the way many phantom-stock or profit-sharing plans do. Here's how they work:

1. A company's owner (or benefits specialist) selects the goal that makes sense for each executive. For example, a sales manager's target might be increased revenues, whereas a quality-control officer's might be reduced product rejects.

2. Owners attach to the goal specific numbers, which generally take the form of targeted percentages of change. Those percentages usually are stretched out over a three-to five-year horizon.

3. Then a PUP document is drawn up. In it, the executive is given a number of performance units, which have no value when they are issued. A clause states that if the executive achieves his or her PUP goals over a defined period, each unit will increase in value to the point where it can be redeemed for its new value, in effect as a cash reward.

"Growth-oriented companies can set executives' goals really high but then include a prorated reward structure so that managers who don't quite make it won't get burned out and leave," says Adam Gaslowitz, an Atlanta lawyer who has helped small companies design PUPs. Companies can also keep setting up new PUP plans for key executives, with revised goals that make sense for the company in its latest growth phase. So if executives are always in the midst of earning new performance units -- which they know they'll lose if they resign before the PUP matures -- there's a real inducement to stay with the business. -- Jill Andresky Fraser

* * *