Benefits and Compensation

Executive Compensation 101: What to Consider

Is your company bringing a new executive on board sometime soon? How do you decide the appropriate level of compensation? How do you align executive compensation goals with the overall company compensation philosophy?

Creating an appropriate executive compensation package is vital to getting and keeping the best-suited executives for your organization. As with any role in the business, the compensation package should be tailored not only to the skills required but also to organizational needs. It should also factor in market-driven criteria such as competitive pay scales. Let’s take a look at some of the key considerations.

Executive Compensation–Consider the Angles

Compensation levels have multiple aspects that must be kept in balance. Typically, there are competing goals. For example, individual motivation and retention goals must be balanced against the company’s need to be profitable and stay within budget. The higher the role in the organization, the trickier compensation can be. Here are some areas to consider.

  • Naturally, the pay level must be sufficient to attract, retain, and motivate individuals with the talent and experience level required to do the job well.
  • The competitive landscape should be assessed in terms of salaries generally offered for the role. Benchmark not just against your own industry, but other industries that have similar skill sets. Look at organizations that are close to the same size as your business (at least the same range) and in the same geographical area. (Generally speaking, executive-level pay increases as company size increases.)
  • Consider what executive level you’re hiring for. Naturally, CEO-level executives will typically command a higher salary than the rest of the executive staff. It may seem obvious, but it can be easy to miss fine distinctions at this level that make a big difference in the appropriate pay.
  • How much of the total compensation on offer will be guaranteed income versus performance-based bonuses or incentives? Determine what criteria will be used to assess the variable pay portion (Profits? Sales? Other metrics?). Typically, a large portion of executive pay is performance-based, thus helping to ensure that the entire organization benefits when the top executives are doing well. There should be both short-term and long-term goals included in this process.
  • What items besides cash compensation can be offered? This answer varies a lot from organization to organization. At this level, it is common to include options such as:
    • Stocks, either given outright or given as options to purchase in the future at a fixed price;
    • A company car or chauffeured transportation;
    • Guaranteed payment upon leaving the organization (i.e., contractual severance agreements made in advance); and/or
    • Long-term components that are paid out only if long-term goals are realized.
  • Company culture should not be ignored. The compensation and benefits package should reflect the company’s values and should also take company goals into account—especially regarding aspects related to pay-for-performance.
  • Consider what level of equality/inequality is tolerable within the organization. Assess how much executives are paid as compared to the average employee within the organization. This can have ramifications for employee morale, especially for organizations in which executive compensation is discoverable in any way.
  • Public perception matters, too. Think through what message the compensation level sends.
  • For publicly traded organizations, shareholder opinions matter as well, and often board approval must be sought. Stock price can be affected by inappropriate executive compensation packages. Paying too much can be seen as an inappropriate use of company resources, especially if it takes away from profit when the new executive does not offset the high salary with profit gains. (The Dodd-Frank Act even has a provision known as “Say-on-Pay” that gives shareholders the right to express approval or disapproval, though this opinion is not legally binding.)
  • Even with a great process to answer all of these questions, it can be beneficial to get external opinions (such as from consultants) to ensure objectivity.

How does this list compare to the process used in your organization? What would you add?

 


About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.