Their companies are small but healthy -- averaging 37 employees, with pretax earnings of $308,500 on revenues of $4.5 million. Ninety-five percent of the organizations are privately held, and more often than not, the chief executive officer -- who pulls down $71,797, including salary and bonuses -- owns a controlling interest in the company.
The corporate decision-makers who responded to this year's INC. Executive Compensation Survey are heads-up, hands-on managers who know their companies inside-out. But compensation strategy is one issue that many of them would prefer to duck.
"If you're asking me what my system is -- how I figure out how much to pay people -- I haven't got one," a typical CEO admits. He reads; he knows what "tax gimmicks" are out there. He also keeps pretty close tabs on what the competition is paying. But he never seems to get around to designing a plan that is tailored to meet the goals he has for himself and his company. When business is good, there is no time. When it is bad, there is no money.
So, he sticks with the basics -- salary, bonus, a sales incentive for the marketing guy, and the usual slate of benefits and perquisites. When annual reviews roll around, he goes on his guts.
"We're not doing much," he says, summing up. "But I'm sure we're not doing any less than what other companies are doing." A nervous pause. "Are we?"
A good executive-compensation package is a coordinated system of financial rewards that is designed to advance a corporate strategy. It is a collection of direct and indirect forms of remuneration, ranging from a simple paycheck to a variety of sophisticated capital-accumulation and equity-participation vehicles. Some are intended to reward; others to motivate.
The contents of the package -- the things a company is "doing" for its executives -- should depend on three things: what is happening in the job market, what the company's short- and long-term goals are, and which compensation vehicle will be most compatible with the corporate culture of the organization. Then there is the matter of tax-effectiveness -- finding those modes of compensation that maximize both what the company is spending and what the executive is pocketing, while still keeping everyone out of trouble with the Internal Revenue Service.
Yet designing all of this requires a planning effort that many small companies are loath to put forth for a document that typically affects far fewer than a dozen people. Besides, it is such a ticklish matter, this business of trying to put price tags on people. Many corporate decision-makers would rather try to get by without any policies, at least for a while.
There really is no such thing as going "without policies," though. Even in the absence of a written plan, precedents are set, policies are developed, and the resulting de facto executive-compensation system works to shape the company's future. The question that executives should be asking themselves is: Are these the right policies for this stage of the company's growth? Is this the plan that will get the company where it wants to be?
The results of the INC. survey provide a snapshot of the packages that have been adopted by companies of various sizes, industries, and geographic locations. But the real story is behind the numbers -- in where these companies have been, where they hope to go, and how their executive-compensation policies will, or will not, help them get there.
Survey profiles: The Chief Executive Officer
Total compensation $71,797
Base salary $59,152
Percent receiving bonus 52%
Bonus, as percent
of base salary 38%
Percent change
in total compensation 25%
Age 45
Years in position 8
Years with company 11
Founder 67%
Board member 89%
Stockholder 92%
Average equity position 65%
The Company
Net sales $4,533,418
Net income
before taxes $308,490
Total payroll $841,148
Number of employees 37
THE "PAY-FOR-PERFORMANCE" TREND
Designing an executive-compensation plan, for many companies, has been viewed strictly as a matter of keeping up with the Joneses. If the competition raises salaries, then it is time to hike the payroll. If one company lengthens its list of perquisites or improves its health-care coverage, then the others feel obliged to do the same.
But it is seldom that simple anymore. Increasingly, companies are finding that they need to factor into their compensation decisions a variety of internal operating-strategy considerations that have little or nothing to do with what the competition is doing: such objective matters as cash flow, growth rates, and profit requirements. What the other guy is doing next door is still important -- it just may not be as important as what is going on in one's own backyard.
The economy has had a lot to do with the change. After two crippling recessions, business is good -- the current revenue and profit projections from the INC. survey are, in fact, stunningly optimistic. Some 90% of the respondents are anticipating sales increases averaging 43%, and 83% expect that boost to be reflected in a 69% jump in pretax profitability. But, consultants say, the lessons of austerity learned during the downturns haven't been forgotten.
"I think there have been some fundamental shifts in the way we conduct business in the United States," says Jerrold Bratkovich, a partner and general manager of the Los Angeles office of Hay Management Consultants. "We're going to see some significant changes in, and a longer term focusing on, a relationship between pay and performance that hasn't existed previously. My only fear is that the turnaround will be too good, too soon, and we'll fall back into the same traps."
