The Take At The Top

Gain-sharing, revenue-sharing, equity participation, and more bonus systems than you can shake a stick at -- when it comes to rewarding key employees, the days of the old-fashioned merit raise are numbered.

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On a table in the corner of Ken Swanson's neatly appointed Silicon Valley office sits a box with a $10,000 Rolex watch inside. It is a none-too-subtle reminder of the stakes that Swanson encourages his young managers to play for. Swanson's seven project managers know that if any of them brings $500,000 in gross profits to Swanson's $20-million construction company, he will wind up with a watch just like the one on the table.

The Rolex might seem a bit superfluous at a company where young managers in their mid-twenties can earn upward of $100,000 a year, but it is an example of the enticements that owners of fast-growing companies dangle in front of key employees. The incentives may differ from company to company -- a one-week, all-expense paid Caribbean cruise, a late-model BMW, a $100 bill, even a six-pack of beer-but the purpose is the same. When a company wants to spark sales, push profits to new highs, or reduce ever-escalating expenses, there is no surer way to get an employee's attention than to reward his performance with pay.

Unlike the world of big business, where regimented compensation schemes designed by well-paid consultants are the norm, the policies and practices followed by the 516 companies that answered INC.'s Executive Compensation Survey are as varied as they are original. At John Stack's $25-million Springfield Remanufacturing Center Corp., in Springfield, Mo., the keystone of the plan is an 82-page financial statement that is distributed monthly to the company's 200-plus employees. Each employee, from chief executive officer to broom pusher, has performance standards and incentive bonuses; with the monthly statement, each worker can measure how big his or her bonus will be. In Green Bay, Wis., Ryan Transfer Corp. president Bill Ryan follows a much simpler system: Every driver with more than a year's seniority at his trucking company gets paid a percentage of the weekly revenues.

Implicit in both of these approaches is an attempt to tailor compensation plans to fit the specific needs of each company. As the owners and managers of small to medium-size private companies will attest, there are no set formulas, no panaceas, no clear paths to follow when it comes to setting pay strategies for the employees who make their companies tick. "Like everybody, I'm constantly searching for the magical formula to keep them motivated," says Robert Clark, the owner of Fort Collins, Colo.-based Concept Systems Inc., a 15-employee producer of educational material for scuba-diving schools.

Many small companies find it especially hard to decide which employees should be singled out for special "executive" treatment, if only because the efforts of one group of workers are often hard to separate from those of another. In response, more and more are linking executive compensation to overall employee compensation and, in some cases, opting for a single compensation system rather than the traditional multitiered approach.

This is one trend suggested by the survey responses, and there are others. They include: tying incentives to specific performance goals, spreading ownership among more employees, and deemphasizing the role of fixed salaries in the overall pay package. It is, of course, difficult to discern how strong or potentially long-lasting any of these trends might be, but they do indicate some of the ways that small companies are thinking about executive compensation.

Trends aside, there are many similarities between the results of last year's and this year's executive compensation surveys, which were both carried out with the assistance of Peat, Marwick, Mitchell & Co., the accounting and management consulting firm. The respondents are overwhelmingly founders, owners, or operators of private companies that have average annual sales of about $4.5 million. The companies are new to the battlefield of American business -- two thirds did not exist 15 years ago. They average 49 employees and span the business spectrum from management consulting to steelmaking.

Total compensation for chief executive officers averages $82,494, up 19% from last year's $71,797. By comparison, the chief operating officer averages $61,044, the chief financial officer $48,426, and the chief marketing officer $52,124. The average CEO tends to be bullish on prospects for his business. Ninety percent of the companies expect to see their sales increase next year, with a little over a third anticipating revenue increases of more than 20%.

An overwhelming majority of the respondents, 86%, report a lack of any long-term incentive plans for their top people. Perhaps that is because many are young companies, where management is consumed with making ends meet rather than worrying about the distant future. Incentive stock options, popular among the nation's biggest industrial companies, are in place at only 6.5% of the respondents to the INC. survey, reflecting the traditional reluctance of owners of closely held companies to dilute their own holdings.

This doesn't mean, however, that companies have neglected forms of compensation other than straight salaries. Thirty-seven percent of the companies have taken steps to improve compensation other than salary during the past year, many adding such benefits as supplemental life and medical insurance or such perquisites as company cars and country-club dues and expenses. Often, these moves are in response to an outside threat -- a competitor's attempt to hire away a key manager, for example. In general, the companies have the same mix of benefits found at larger, more established enterprises. A great majority offer medical and life insurance, and more than a third have profit sharing. The company car is still the executive perk of choice, with supplemental life insurance a close second.

As for their general thoughts about compensation, more than half of the respondents, 52%, say that establishing pay levels is their primary concern. Last year, the chief worry was controlling the spiraling rise in benefit costs. Peter T. Chingos, who heads Peat Marwick's executive compensation and personnel consulting unit, suggests that this change reflects economic trends more than anything else. Inflation has cooled, relieving some of the pressure of the increasing cost of employee benefits. A stronger economy has also led some companies to worry about whether their pay scales are sufficient to retain valued employees.

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