CEOs Talk Pay, Compensation Philosophy and Salary Communication
What's Your Earning Potential?
What's Your Earning Potential?
Unless you work at Gravity Payments — where co-founder and chief executive officer Dan Price famously raised the salary of all his employees to at least $70,000 a year while concurrently reducing his own salary from $1 million to the same $70,000 — not everyone is going to be paid the same as their CEO. But according to PayScale data, when it comes to compensation philosophy and employee happiness, the money itself may not be the kicker.
PayScale learned in a 2015 study on employee engagement that transparent compensation planning—i.e. explaining to employees why and how pay decisions are being made, and even providing insight into company finances—can result in greater employee engagement and happiness than a raise. In fact, 82 percent of employees we surveyed felt satisfied if they were underpaid but the employer communicated the reason for the smaller paycheck. Clear communication around pay was actually one of the most influential factors when it came to employee sentiment.
PayScale asked a few CEOs for their thoughts on compensation philosophy and communication, and this anecdotal evidence showed a legitimate concern and desire to pay their employees fairly.
Adam Sheppard, CEO and Co-Founder of 8ninths, a Mixed and Virtual Reality studio with 15 employees, said he adopts a 'feed the kids before we feed ourselves mentality."
'I've personally made many financial sacrifices in order to ensure my employees are well taken care of and happy," says Sheppard. 'As [a co-owner, I] only take money when [I] can, and, for the most part, payroll is the most important thing we ensure we can meet through thick and thin."
Sheppard says leadership at 8ninths communicates compensation decisions in one-on-one meetings, which is perhaps a luxury of operating a small business.
'We typically evaluate our employees' compensation level with a 5 to 20 percent range of salary bump tied to our evaluation of performance," he says. 'I think [our employees] see us work hard and assume we're investing in getting the company to the next level. We tend to be pretty frugal, and culturally I think they understand we're investing in the long term payoff as opposed to high salaries."
Regarding the planned 2017 execution of the Dodd-Frank Act's ratio transparency rule, Sheppard has mixed feelings. 'At a certain company size—say 150 employees or more, or revenues over $10 to $15 million—it's a good thing. But as a co-founder and CEO, I do worry that it's a single metric that doesn't take into account how much personal, financial and health stress it takes to run a successful business."
Ben Reid, CEO of Elasticiti, a seven-person media industry analytics firm, says that even though his fledgling company has no formal policy around compensation communication, his employees are cognizant of his salary and how it impacts the company as a whole.
'It's understood that at a company at this stage the executive pay is intentionally low, driving as much profit back into the growth of the company as possible," he says.
Reid agrees with Sheppard's view of next year's Dodd-Frank transparency rule. 'It makes sense for a public company, but it's not super relevant for us," he says.
Mike Metzger, CEO of PayScale—a 350-person company and the producer of this report—believes employees of his company care about CEO pay 'in the sense that they want to know, 'Is this company fair?'"
'It's less about how much the CEO is making, and more about whether it's an inequitable distribution of compensation across the organization," he says.
Metzger is quick to admit that in bigger companies, decisions about compensation process and philosophy become more complex by orders of magnitude. But PayScale's philosophy is to be fair, transparent, and to inform and empower managers to communicate pay decisions and pay philosophy, in order to give employees a sense of how compensation is defined across the company, and where they fit.
Says Metzger, 'Regarding our exec team, we use the same methodology as we do with all our employees: We evaluate the role, we look to the market to see what people in that role are being paid, and we decide where an individual sits relative to that range."
Regarding how employees feel about CEO pay in general, Metzger says, 'I would say for most people it's something of a common sense thing; I think people tend to formulate their opinions in a way that isn't very reliant on data. Is that good or bad? I don't know. But it is reality."
As for the Dodd-Frank Act requiring publication of public company CEO pay in 2017, Metzger says he believes, in general, that the principle of the Act is valid.
'In general I think transparency is good," he says. 'The awkward thing about it is it's an asymmetrical situation; we wouldn't disclose the salary of any other individual. But, when you're talking about CEOs, I think it's reasonable to say, 'Hey, that just comes with the job.'"