One of the first things that come to mind when figuring out how much to pay someone in an executive role is either conducting or purchasing a market study. However, there are several other things that must be completed first.
Let’s take a step back and look at the process leading up to this point. When preparing to assess the market at the executive level, this assumes you’ve already:
- Identified your business strategy (your short- and long-term goals);
- Reviewed your existing executive compensation programs to see what is good and what needs to be modified;
- Looked at your overall compensation philosophy and identified items and components you want to include;
- Assessed your market positioning (i.e., do you want to be the top payer in the market or in line with the average?); and
- Identified the jobs you’re researching, including the full scope and whether they are dual or hybrid roles.
Once you’ve done all of that, you need to be ready to look at data, surveys, and peer information to actually conduct the market study. This process will allow you to take a look at the marketplace, extract data, analyze it, and come up with a number that is a good estimate of the value of executive positions.
Preparing for a Market Study on Executive Compensation
Even once you’re ready for the market survey, it’s not as simple as looking at a database and pulling out a number. Some additional preparation is needed.
First you will want to identify the labor market parameters. This includes the peer group, industry, financials (size), and geography. This information might have already been identified in the company’s compensation philosophy.
When you look at peers, assess: Who do you compete with for talent? For business? Where do executives come from and where do they leave to? For example, if you’re a financial services company, are you losing them to other financial services companies? Are they perhaps going to a different sector, such as insurance or investments?
That’s important to understand. “The point here is that you need not look exclusively at your own industry, but at where executive talent can be groomed and can provide the skill sets that you need to contribute to your organization,” Diana D. Neelman, CCP, said in a recent BLR webinar (BLR is CER’s parent company). Neelman is a principal and senior consultant with Compensation Resources, Inc.
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When you compare financials, what you’re looking for is a company of comparable size. Generally, revenue and market cap are used to identify comparable peers. The accepted range is approximately between one-half and two times your own financial figure. For example, if your company revenue is $100 million, look at companies with revenue ranging from $50 million to $200 million.
When considering geography, know that it tends to play a somewhat limited role for executives as pay differentials tend to be insignificant at the executive level. Therefore, a national scope would be appropriate. In some cases, however, a high cost of living area may lend itself to an examination of peer data in similar areas.
Now that you have the labor market parameters set, you need to define the job descriptions and titles. You need to be able to confirm the full scope of responsibilities for appropriate market comparisons. Knowing what the jobs are will be crucial to enable you to pull the appropriate data from your resources. It’s also important to consider whether executives take on multiple roles, such as business development.
Next, review your existing compensation programs for an understanding of award opportunities. In other words, what do you provide as far as variable pay, and how does that compare to the marketplace? What is your philosophy? How does that compare?
Finally, examine your performance measurement and appraisal tools. Confirm that they can adequately measure performance. They should be effective in accurately assessing performance and therefore justifying pay actions. If not, they may need to be updated.
The Market Pricing Steps for Executive Compensation
That’s a long list to prepare adequately for the market pricing study. But it’s well worth it to ensure that your executive compensation is appropriate. Now you’re ready. Here are the steps to determining the right executive pay plan for you, according to Neelman:
- Match the position to survey jobs and other comparables. You want to match by job content and appropriate demographics/cuts and use at least two or three sources. Be sure to look at the industry, financial (size), and geography, if necessary.
- Use peer data when appropriate. When available, this is great—but it may not always be available. "There are instances where, for a small company or a start-up company with revenue that is very low, there may not be any peer comparators to utilize, so the emphasis would be on published surveys," Neelman told us.
- Adjust the data to common date. You need to adjust the data to the date you’re planning to start the program. This not only lets you compare data sources more accurately, it also reflects the new level that data now represents in the market.
- Calculate central tendency. Once you have all the data, analyze it. This includes calculating the mean, median, trimmed mean, and market consensus. The mean is the simple average. The median is the middle number. The trimmed mean is the average that eliminates the high and low data elements. Finally, the market consensus is the average of the mean, median, and trimmed mean; it represents the best estimate of the market value for the position.
- Compare and analyze internal data to external (market) data. This is where you take the number you’ve come up with and compare it both internally and externally. Look at what the incumbent is being paid versus what the market implies. Adjust if necessary.
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