The Take At The Top

Some good news, and some bad, about executive compensation. First, the good news is, the average CEO is taking home $76,200. The bad news is. . .

 

Top executives of small and medium-size companies felt the 1982 recession where it hurts most -- in their wallets. Poor business conditions prompted nearly half of them to make changes in their compensation practices in the past year, with wage freezes and cuts in pay hikes topping the list of actions taken. Among the other options chosen by these companies were cutting salaries and waiving or reducing bonuses.

This bad news, however, is offset by the fact that on average, small and medium-size companies expect to give executives a 9.9% pay hike within the next year (pay raises of 10% or more are predicted by 23.5% of these companies). That is what INC. and Peat, Marwick, Mitchell & Co., a leading international accounting firm, found in a survey of more than 10,000 small businesses. The findings are based on responses from 466 U.S. companies representing more than 1,000 executives.

Among the key conclusions about pay practices gleaned from the INC./Peat Marwick study are these eight points:

1. Small companies are abandoning across-the-board pay hikes in favor of merit raises and, in this way, are making better use of their salary dollars.

That, says Peter Chingos, a principal in Peat Marwick's compensation practice, puts them in step with the country's larger corporations.

2. More than ever before, small and medium-size businesses are formally evaluating employee performance.

One out of three companies reports that it has a "formal performance appraisal process" in place, and, as Chingos points out, that is a surprising but favorable trend. However, performance appraisals still haven't caught on in companies with annual revenues of less than $5 million.

3. Raises granted to small business executives in the past year (an average of 7.7%) are identical with those awarded to the people who run large corporations.

However, chief executive officers of companies with little money for pay hikes took less so they could give more to those who work for them.

4. Another way small companies are trying to get more mileage out of their compensation programs is demonstrated in the way they are now developing their bonus plans.

As Rose Marie Orens, a manager in Peat Marwick's executive compensation practice, points out, greater numbers of small and medium-size companies are setting the size of their bonus pool in a prescribed way. For example, 26% of the companies responding said they set bonuses by a fixed formula; 14% use a formula established annually; 11% match achievement to a business plan or budget; and 1% rely on comparisons with their peer companies. Only half of them make "discretion" an element in fixing their bonus pool.

5. Less than a quarter of small and medium-size companies provide supplemental retirement benefits or deferred compensation.

Only 24% of the chief executive officers report that they receive supplemental retirement benefits, and just 19% get deferred compensation.

6. Few small and medium-size companies provide disability insurance for employees, although generally for people under the age of 65, the incidence of disability is higher than the incidence of death.

"Shortand long-term disability insurance is a fairly inexpensive benefit," notes Chingos. "Yet, only 36% of the companies provide short-term disability and 35% long-term disability, while 81% of the companies are providing life insurance. That is something smaller companies need to think about."

7. Small and medium-size companies that offer capital accumulation and long-term incentives remain rare.

More than 80% of the companies surveyed say they provide no capital accumulation or long-term incentives to top executives. Among those that do, the more popular choices are incentive stock options, stock purchases at book value, and stock purchases at a formula price.

8. A growing number of small and medium-size companies are providing tax and financial planning as a fringe benefit for executives.

It is expected that this benefit is provided to CEOs. The surprise is that it is now being extended to other top executives.

The 1983 INC./Peat Marwick survey spanned a variety of industries. Manufacturers made up the largest single segment of the respondents (39%), followed by business/professional services companies at 26%. (Business/professional services is made up primarily of architectural, accounting, software, medical, and engineering firms.)

Located in all 50 states, the survey participants average slightly more than $4 million in sales. Some 31% of the businesses report annual sales of less than $1 million; 23% generate sales of $1 million to $2.49 million; 18% generate sales of $2.5 million to $4.99 million; while 28% reported sales of $5 million or more.

The information collected as a result of the INC./Peat Marwick survey is concentrated in seven general areas -- executive pay: salary and bonuses; incentive practices; pay by industry; pay by region; benefits and prerequisites; compensation policies; and boards of directors.

Executive pay: salary and bonuses. Chief executive officers of small and medium-size companies currently earn, on average, $76,200 annually, including a base salary of $65,500. Average total compensation for chief operating officers is $51,500, with a base salary of $45,600. For chief financial officers, the average is $44,200 annually (base salary: $39,400), and for chief marketing officers, it is $47,500 (base salary: $42,600). Pay, however, varies widely. CEOs report total compensation ranging from $12,000 to $330,000.

 1 | 2 | 3 | 4  NEXT