Executive Compensation: Qualifying and Compensating the Top Levels of Your Organization
The following is a transcript of the question and answer session that followed PayScale’s webinar, Executive Pay 101: What You Need to Know. The topics covered include qualification and generalized methods of compensating top level executives, vice president and above. Answers are provided by Sharon Koss, SPHR, CCP, president of Koss Management Consulting.
Q: Are you aware of any executive positions that pay on a quarterly basis rather than an annual basis? And, if so, what circumstances would warrant this approach?
A: The quarterly approach to executive compensation has to do with a greater emphasis on executive bonuses and getting paid more often. One of the things that we’re seeing in the younger generation who are now taking management and executive jobs is that pay frequency is a big deal. To wait for a year for a bonus that might be up to 150% of your salary really takes a little bit of planning. So, what’s happening is, by having a little bit of hold-back, meaning you don’t pay out everything that’s earned in the quarter, because sometimes you have some ups and downs, that payment is more frequent. It might start out twice a year and then maybe you can go to quarterly. You’re going to have to have good records and a good system, but the more you can pay out right after the [good] behavior the better off you will be.
Q: Does it make more sense and have more credibility if you have an outside compensation specialist do this executive pay work?
A: Number one, I would say as a caution here is that this is your bosses’ pay and the people you report to. Number two, there’s a lot of scrutiny of this particular resource. Also, your board of directors may have a compensation committee and what may be important is to talk to that group with another boss and find out what their experiences have been. Because, if you aren’t somebody who is familiar in this area you want to make sure that you don’t get in over your head.
Q: How can you benchmark the benefits other than base pay and bonus, for example, SERPs, executive agreements, etc.?
A: You have to look at what’s typical for an executive in your industry. I work in a lot of family-owned businesses and there’s a benefit of being in a family business because they’re privately owned, they don’t need a bunch of layers of commission and they’re not on the stock exchange. Look at what a normal benefit package might be at an executive level at your peer companies. Where you can find this information often is at the organizations that your company belongs to, like a hospital association or high tech association. They will have a lot of information of what a typical package looks like.
Q: What is a reasonable pay differential between the highest paid employee (such as the CEO) and the lowest paid employee in your organization?
A: Well, in my personal organization it’s just my husband and me, so I want to stay married. (laugh) In the United States there are huge differentials between what a CEO makes and what the average employee makes. I think that fact in the future may change some. Skill sets are changing, we’re no longer relying on huge investments in equipment or manufacturing processes. Our people are our revenue and that moves us more into the knowledge revolution making the differential factor go down and I think it should.
Q: Are you seeing an increase or decrease in long-term incentive plans for executives?
A: It depends if you have stock options or not, and if you do have stock options what’s happening to your stock. One of the things in the Towers Perrin Survey was a question, “Have you dealt with your underwater options yet?” which means you now have to buy them at a higher price than the public can get them. This of course doesn’t make any sense. The answer was “No.” I think people are sitting back wondering what is going to happen and we don’t have a long-term prediction right now. I think we’re all looking at next week, next month, next year, but going out too much further I think is making people pretty nervous.
Q: Do you think people should get a bonus if the company is losing money?
A: I think that if the person has done what ever has been asked of them and there’s money attached to that, such as if you opened a facility in another city on budget and on time and you had a written plan that said what you got for that, I think you need to follow whatever you had in writing. But what you have to think about when you design these things is what the worst possible, scariest scenario is. If you open this business on time and on budget, but the whole rest of the company doesn’t make money, is it okay that this persons gets paid for that? Sometimes you need to pay the bonus to get things restarted and reseeded. I think the big money should come when a company is profitable.
Q: When it comes to using salary survey tools for executives, which of the revenue scopes (organization size, revenue, industry, or geography) make the most sense when evaluating an executive job?
A: The more information you can do on a customized basis the better. Using PayScale’s salary tools (industry, region, job description) helps, because we are past being able to look at “CFO” on a survey and think that it fits all CFOs.
Q: I like your equation of “Talent + Competence = Pay.” Do you have tools to measure executive talent?
A: You know, if I did I could probably retire right now. I think a lot of that is based on performance appraisals and value. I think all of us are being taxed to prove your value as to whether you have the tools that are certainly decided by your executive staff and your owners as to what is valuable to them. Sort of like, “What have you done for me today?”
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