Top Execs Take Home An $8,600 Raise

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Double-digit inflation nibbled away at a lot of paychecks last year, but not for most of the people who run smaller companies. Instead, they actually gained ground -- with average increases of better than 18% in total compensation during 1980. For chief executives alone, pay hikes averaged 19.9%, bringing their average total compensation to $73,400. At the same time, other top managers of small companies shared in the growing prosperity of their companies, with compensation increases that ranged from 18.1% for marketing executives to 21.2% for operating officers. Overall, the raises nudged average total earnings for small company managers beyond the $50,000 mark.

These and other figures emerge from INC.'s first Annual Compensation Survey of more than 9,800 smaller businesses in the United States. The results, based on responses from more than 900 companies employing over 1,500 executives, reveal new trends in executive pay practices for the 1980s. The chief conclusions emerging from the INC. survey are presented in tables and charts on these and the following pages. They include:

* Executive compensation as a percent of total payroll ranges from an average of 8.3% for financial officers to 23% for chief executive officers.

* Medical and life insurance benefits are universal among smaller company perquisite packages. The majority of the larger companies -- those with sales of $5 million or more -- provide company cars for their executives. Among smaller firms, only two out of five furnish automobiles, primarily for CEOs. Regardless of company size, less than one out of four underwrite club memberships.

* Paychecks keep pace with company size. Total compensation for CEOs in companies with less than $1 million sales averaged $45,600 last year.In comparison, chief executives in firms with volumes of more than $10 million averaged $129,400 in total pay. A similar pattern emerges when the figures are broken out by size of work force. Total compensation for CEOs managing companies with less than 50 employees averaged $59,700 in 1980, compared with $149,100 earned by counterparts in firms with more than 250 employees.

* Top executives in the construction industry come out on top as the highest paid smaller company managers, chalking up an average total remuneration of $87,600 last year. Not far behind are manufacturing executives, whose 1980 total compensation averaged $82,300.

* There are scant differences in regional pay levels. Averaging total pay of $74,700 last year, CEOs in the Northeast came out ahead of their counterparts in other regions by a mere $1,100 to $2,200.

* Salaries and bonuses constitute more than 90% of smaller company executives' total remuneration.

* Outside directors earn, on average, about $2,400 in annual fixed fees, plus slightly more than $200 per board meeting.

Beyond these findings, data collected from the INC. study indicate several new directions for executive compensation during the decade ahead. Four principal forecasts emerge from the survey results:

1. The base salaries of small business CEOs will average $132,000 by 1990; total remuneration will top $190,000. Based on inflation and simple arithmetic, salaries will hurtle past the six-figure mark by 1987.

Top management pay raises tend to outpace inflation by at least 2% or 3%. With inflation headed downward but unlikely to dip below 7.5%, the odds are that executive compensation will continue to increase by at least 10% a year. At that rate, paychecks will double roughly every seven years. Thus, the $50,800 average salary earned by small business CEOs in 1980 will become $102,000 by 1987, $132,000 by 1990, and about $204,000 by 1994. Likewise, average total remuneration, which will top $80,000 this year, will soar to $143,000 by 1987, and exceed $190,000 by 1990.

With an average salary hike of 12.3% this year, chief executives will realize a slight gain in real income measured against inflation's current 9.6% rate. Others in the top echelon will come a little closer to breaking even, 1981 salary bumps ranging from 10.9% for operating and financial executives to 11.4% for marketing officers.

Obviously, prevailing inflation tempers take-home pay and serves as a benchmark for scaling management salaries. But, as the INC. survey shows, its bite has little direct influence on compensation policies themselves. Seventy-four percent of the companies responding to the study indicated no change in 1981 pay practices related directly to inflation levels. Of the 26% that did make adjustments due to inflation, 12% hiked their executives' salaries, 7% added cost-of-living increases, and 5% beefed up bonuses.

2. Cash will remain king in small business pay schemes. Preoccupied with present-value concepts, particularly when it comes to their paychecks, executives' preference for current and deferred cash will be as persistent as inflation's erosion of their buying power. Given the pressure exerted by the latter, along with the welcomed shift to a 50% tax ceiling on earned and deferred income, it's no surprise that cash salaries and bonuses constituted about 92% of the small business executive's 1980 pay package.

Cash-related compensation is in, and the growing accent on bonuses is perhaps the strongest testimony to that fact. More than three out of four companies responding to the INC. survey pay bonuses. Of those, 74% pay cash. Last year, top management's average bonuses ranged from $9,000 for marketing executives to $18,400 for CEOs. In between were chief operating officers, who took home an average cash bonus of $12,000, and financial managers, whose bonuses averaged $10,400.

Overall in 1980, the average cash bonus of small company CEOs and chief operating officers jumped by 26% and 31%, respectively. Not far behind were top financial and marketing managers, with bonuses that were fatter by about 25%.

3. Executive pay will be tied more directly to performance and results. Very few smaller companies have instituted the long-term performance plans now prevalent among giant corporations. Since most smaller firms are privately held -- 96% of the INC. survey respondents represented independent private enterprises -- there has been little pressure to replace stock options with more sophisticated incentives, such as performance shares, dividend units, or stock appreciation rights. Nonetheless, small company compensation practices will focus increasingly on pay for performance. Discretionary windfalls and routine lump sums are giving way to pay plans tied to company revenue targets and operating results. Among respondents to the INC. survey, close to one out of three reported that they now base executive salary increases solely on merit.

The pay-for-performance trend is materializing in the broader use of short-term incentives or bonuses. Ten percent of the survey respondents indicated that they added an executive incentive plan to their pay programs last year. Another 9% instituted new bonus plans for top management, and more than 6% set up profit sharing for the first time.

More than 77% of smaller companies now maintain executive bonus plans, generally in the form of annual cash awards (only 5% have stock bonus plans). The larger the company, the more likely bonuses are part of the executive pay package -- 88% of the companies with sales of more than $5 million are bonus-paying, compared with 65% of those with less than $1 million in sales.

Regardless of company size, however, it is clear that optimizing the motivational value of bonuses has become a primary objective. Four out of five smaller firms now peg bonus payments to company profits -- the bottom-line results that directly reflect executive performance. Another 14% tie bonuses to sales performance, while only 7% base bonus pay solely on discretionary nods.

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