By all accounts, TGaS Advisors is having a banner year. The East Norriton, Pennsylvania, company, which consults for the pharmaceutical industry, is on track to reach more than $5 million in sales in 2008, up from $3 million in 2007. Five new employees have joined the company, bringing its head count to 23, and it made the 2008 Inc. 500 with a three-year growth rate of 1,380 percent.

But things don't look quite so good to founder and managing partner Stephen Gerard, who expected revenue to reach $6 million. Now Gerard has the unhappy chore of telling his employees that they may not be getting their bonuses this year. "We're prospering, but not to the extent we thought," says Gerard. "It's hard: How do you go from one meeting where we're saying, 'Hey, we made the Inc. 500' to the next where we're telling them, 'We missed our goals, so you are all getting goose eggs'?"

As the end of the year approaches, and the bad economic news shows no signs of slowing, many business owners find themselves in a similar predicament. Chances are that business hasn't been as good as managers expected when they set their targets. As a result, a lot of employees are going to find coal in their holiday bonus stockings this year.

And for CEOs, that presents a problem: How do you retain your best employees if they aren't receiving bonuses? It's particularly painful now, given that many companies are coming off several boom years, when targets were relatively easy to meet. "The good news is that people here make pretty healthy salaries, so I don't feel that I am taking bread out of anyone's mouth," Gerard says. "But I'm not ignorant enough to think that they are cheering."

Almost all of TGaS's employees are senior-level executives who came to the company after years of experience in the pharmaceutical industry. If the company had reached its sales goals this year, they would have received bonuses equivalent to 10 percent to 30 percent of their base salaries, depending on the performance of their individual departments. For a manager making $150,000, that's a potential bonus of $45,000. Obviously, that could make a major difference when it comes to job satisfaction.

For CEOs facing this kind of predicament, open communication is key to avoiding a revolt, says Eric Mosley, CEO of Globoforce, a Southborough, Massachusetts, firm that sets up employee reward programs for Fortune 500 companies. And that openness must start at the beginning of the year, when bonus targets are being set. Mosley says managers should sit down with employees or team leaders and discuss the targets, and then keep them apprised of their progress throughout the year. "Set up an outlandish target, and you'll end up with very disgruntled employees," Mosley says.

At TGaS, the goals were laid out in January at a meeting of the company's five senior managers. At the time, according to Gerard, the goals seemed doable. No major shakeups had occurred in the company's market. Its stable of clients had remained steady, and with new employees coming aboard, new accounts were expected to follow suit. "Setting the targets is a little hard to do in a young company, because there is no long-term historical trend you can refer to," says Jeffrey Wojcik, who was part of the team that designed the goals and who may not receive a bonus this year. "But I felt very comfortable with the targets we were setting."

Gerard kept workers apprised of their progress at monthly meetings, distributing printouts that detailed the financial position of each department and the company as a whole, as well as the numbers that needed to be reached in order for the bonuses to kick in. The poor performance started to show up in the monthly updates midsummer. The company hadn't lost any clients, but attracting new business had proved harder than expected, in part because of the weakened economy. And Gerard says the company lost focus. "You get so sucked up in the day-to-day that sometimes you forget to do other things, like making sales calls," he says.

In August, Gerard began alerting employees that they were unlikely to receive their full bonuses, if they received anything at all. But he knew he needed to provide some sort of carrot to keep up morale. "I don't want anyone to walk out of a performance meeting with the feeling that the situation doesn't seem fair," Gerard says.

He is thinking about lowering the revenue threshold for partial payouts, which is currently set at $5.3 million. And he has also made it easier for employees to earn equity in the company. Now, employees will be awarded shares based on hard work, not just on meeting their numbers. That gives Gerard leeway to reward a manager whose sales calls didn't reap immediate returns but may have laid the foundation for a long-term relationship with a client. "We still have to be cognizant that these people are increasing the value of the company," says Gerard.

For Wojcik, the additional equity is just as good as a bonus check. "I came here for the opportunity to get in at the ground level of a small but growing company," he says. "If we keep growing, the rewards that weren't there in the short term will be there in the long run."

In 2009, Gerard plans to make more changes to his bonus system. He wants to move away from an annual incentive plan and start distributing bonuses two times a year or more, which will give his employees the potential for more immediate rewards. At the same time, he wants to tweak his plan so that it rewards employees who boost long-term performance, not just the current year's bottom line. A key component of that will be giving extra bonuses to those who land two-year contracts. "Bonus plans are these schizophrenic things," says Gerard. "You start the year thinking you've got the most elegant plan, but as the year goes on, you find ways that you can do it better."

Bonuses: How Do Yours Compare?

At left: We asked Seattle-based PayScale, which runs a salary comparison website, to share bonus data for some of the most common job titles in its database. At right: We surveyed Inc. readers about their bonus plans for this year.*

Job titleAverage bonus% receiving bonus
Customer service representative 90038%
Executive assistant 1,70046%
Human resources manager 3,50052%
Project manager, IT 5,00054%
Marketing manager 4,60059%
Financial controller 7,10063%
Regional sales manager 9,60066%
Vice president, operations 16,50076%

*This survey was conducted among members of Inc.'s Inner Circle online research panel, which is hosted and maintained by iiON Corporation.