When setting employee pay, there are a lot of things to consider. Perhaps nowhere is this more evident than with executive-level pay considerations. Executive compensation differs quite a lot from other forms of compensation, and the thought process that goes into setting it must differ accordingly. Executive-level employees, just like other employees, are motivated in part by salary and benefit packages; that said, there are a lot of nuances that are not relevant for other compensation levels.
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Ways Executive Compensation is Unique
Here are some of the many ways that executive compensation differs from other compensation:
- At the executive level, there are typically benefit options that are not offered to lower level employees. This might include things like the ability to fly business or first class (or on the company jet) when traveling for the company, or maybe it is the use of a company car or other similar perks.
- Executive-level compensation is not necessarily tied to any preexisting pay grade or salary band, which are common at lower levels. This makes it more complex to evaluate what level is appropriate for a given role. Setting executive compensation levels can be a complex task.
- For a public company, executive compensation and benefit levels may be subject to board approval.
- Executive compensation is also subject to more scrutiny, both legally and publicly, for public organizations.
- With differing types of compensation, there are new tax considerations to think about. For example, at the executive level, it’s not uncommon to offer company stock as part of the total compensation package. But this type of compensation comes with quite different tax implications than a standard salary would. From an HR management perspective, this means that those involved with payroll processing must be knowledgeable in the tax implications for any executive salary decisions.
- Often, executives have a high level of at-risk pay. This may mean that they receive high bonuses when individual and company goals are met. This is typically implemented as a motivational tool. The percentage of total compensation that comes from base salary is usually much lower for executives than for other employees.
- Executive compensation packages may also come with a detailed employment contract, which is far less common for other employees. This type of contract may specify severance payouts upon leaving the organization, or it may outline a job guarantee (or severance) in the event of an acquisition or merger. Few other employees typically have such guarantees.
All of these considerations must be taken into account when setting executive pay levels and total compensation packages.
Another consideration, however, is how to communicate these differences to other employees, which is a concern for any public company, as these companies are often required to disclose more information about executive pay levels than private organizations. Many employees may instinctively feel that executives are paid too much—no matter what level of responsibility they have for the organization’s overall success. This can be a de-motivator for other employees, which is something that also must be managed.