And many CEOs dislike offering a beefed-up benefits plan for executives, because benefits represent costs that are at once too fixed and too difficult to control. Flexible-benefits plans can be more effective, maximizing the benefit to the executive while at the same time capping the total expenditure. But only 10% of the companies that reponded to the INC. survey are taking advantage of these plans. Consultants attribute the disinterest to widespread confusion over how such plans work, and, as of this spring, stricter IRS policies regarding them.
Deferred-compensation options are painless enough; in fact, they give a corporation added working capital during the deferral period. But they tend to be unpopular with would-be new hires. How can the executives be sure their company will be around in three years, or five years, whenever they might want to take the cash? If the company should go under, they would be waiting in line for their pay, along with every other unsecured creditor.
Small companies often forget, says Hay Management's Jerrold Bratkovich, that leaving a large organization for a small one can look like a risky proposition. "To attract and hold good people, you've got to offer an upside that compensates for the downside," he says. "You've got to balance risk with reward." It takes a willingness to tailor individual compensation packages -- not to mention some creative negotiating skills.
Michael Whalen can vouch for that. As owner and founder of The Cheese & Specialty Foods Co., a 35-employee, $11-million operation in Denver, he recently went through an "exhaustive" search for a vice-president of marketing and sales. He eventually nabbed one, a 15-year veteran of competitor Nobel/Sysco Food Services Co., but it took a highly lucrative compensation package to pry the man loose. The terms are these: a salary of $65,000 a year (more than Whalen himself is taking in direct compensation) plus a deferrable bonus that is tied to certain annually set goals in the areas of gross margins and return on assets. And the clincher is this: The new vice-president will get equity, after certain retained earnings goals have been met.
"I want to surround myself with better people," says Whalen, explaining his generosity. "I don't care if the vice-president is making more money than I am, if he can do what he says he's able to do." But salary and bonus alone probably wouldn't have been enough to grab this candidate or any of the large-company candidates Whalen interviewed. He found that they want the one thing small-company executives are least willing to part with: equity. "They want to be the conductor, and if they don't see the baton, they don't want to negotiate."
"When companies find a good candidate nowadays, you've got to start from scratch," explains Corbett, the recruiter. "You've got to talk about what the candidate wants, what the spouse wants, even what the kids want." As a result, he says, you do hear about equity and equitylike vehicles that give the candidate a feeling of participation. You hear of $2-million and $3-million companies offering salaries of $30,000 to executives -- sweetened with $100,000 bonus opportunities. You also hear about one-time, front-end bonuses, signing inducements such as mortgage differentials, generous allowances for a spouse's job search, or agreements to provide education for a special-needs child. "All the old rules have gone out the window," he says. But what happens once that prized executive comes aboard or is brought up through the ranks to a senior position? Again, there is a tendency for chief executives to overemphasize the sheer challenge of growing a company as compensation in and of itself. CEO-owners have been known to sit on salary increases and balk at installing the devices that allow executives to pocket more income with lower taxes -- and sometimes for quirky reasons.
"Our previous leadership didn't believe in this so-called tax gimmickry," says Terry Blakely, controller of Universal Steel Co. of Michigan, a 70-employee, $15-million distributor in Lansing. "They were unusual, in that they felt a certain pride in seeing themselves and their employees paying all the tax they could pay. They didn't care much for the little angles against the income tax system, so they never took into account how to get more money to the employees. Now, long-term disability, supplemental life, deferred bonuses -- these are ridiculous things to lose a person for, especially when you know it's going to take several years to really replace somebody. But they didn't seem to see that. They paid you your salary, and that was it." Sometimes, consultants say, that salary seems inexplicably frozen. And when that is the case, there is usually a CEO-owner in the background, who -- unlike Cheese & Specialty Foods's Whalen -- is feeling a bit crowded by the compensation he or she is shelling out to the rest of the top team. "Many of these guys are grossly underpaying themselves," says Wyatt consultant Ed Redling, "so they hold everybody else's compensation down." They forget, he says, that they hold equity. All they remember is the figure on the stub of the paycheck, and if somebody else's numbers are getting too close, it is admittedly hard to take. "I can't see somebody else earning more than I do," says Edwin J. Snyder, of E. J. Snyder Inc., a $2-million Baltimore mechanical-construction contractor. "If they did, I'd do what they do."
The CEO can sometimes be convinced to pay his subordinates better, but Redling usually approaches the problem from the opposite direction. "I've had to convince several [CEOs of small, privately held companies] to take significantly more -- whether it's salary and bonus or whatever. Just move his total comp up so he could pay his second line much more effectively, much more appropriately."
