Inc.'s Annual Compensation Survey

How small companies reward their key executives.

Tweet

THIS PAST YEAR MAY HAVE WITnessed the final triumph over inflation, as some contend, but that has not stopped chief executive officers of small companies from giving themselves huge increases in compensation. In all fairness, other top officers didn't do so badly either in 1985, though they didn't reach the average 25% increase in salary and bonuses claimed by CEOs. To put the raise in perspective, consider that inflation in 1985 was close to 4%; compare that with five years earlier, when, with inflation over 13%, CEOs gave themselves a paltry 18% increase. As for benefits in 1985, there was a move toward adding proigrams geared to performance -- long- and short-term incentive plans, special awards, and performance appraisal systems -- while reducing more traditional programs, such as health and retirement benefits.

These are some of the conclusions to be drawn from INC.'s eighth annual compensation survey, a summary of questionnaires sent to a random sample of INC. Subscribers. The 853 responses came mostly from private companies that range in size from start-ups with one employee and $2,000 in sales, to 40-year-old companies with thousands of employees and revenues of more than $1 billion. On average, the companies surveyed have 119 employees and sales of $12.6 million, but those figures are a little misleading, due to the presence of a handful of very large companies. Looking at median size rather than average, the typical company has 19.5 employees and $1.7 million in sales.

As for the typical founder and CEO, he is 45 years old, has 11 years with the company, and takes a salary of $71,000. If he pays himself a bonus, and over half do, he'll pocket another $35,000. The chief operating officer, chief financial officer, and chief marketing officer fall just below the CEO in age (they're in their early forties) and in years with the company (7 to 8, on average). Among the three, the COO fares best in salary, bonus, and increases over last year. Ironically, the guy who handles the money, the CFO, gets paid the least.

Figuring out what and how to pay people, especially key employees, is still one of the greatest challenges of running a small company, but it's only one of many. So it is not surprising that most companies in the survey have no formal compensation plans at all. Most use no base salary ranges or any kind of a formal performance appraisal system. Even bonuses are apt to be discretionary and paid at such traditional times as Christmas or year end. But that's not to say that these companies aren't interested in alternative forms of compensation.

Tom Hackett, for example, CEO of Advantage Business Services Inc., a $2.5-million payroll check processor in Auburn, Maine, is working on a cost-tracking system that he can use to set performance bonuses for 15 or 20 of his middle managers. And Charles Chauncey, CEO of LCC Graphics Inc., a $5-million Amherst, N.Y., lithographic prepress service, is looking for a special compensation program that will motivate his hourly workers to keep to the high standards demanded by his quality-concerned customers. What he has in mind is some sort of flexible "payroll pool" with a "little bit of a cushion" that would also protect his bottom line from the spordiac workloads inherent to his business. (It's not that Chauncey hasn't experimented already. He once had a profit-sharing plan, but threw it out because he discovered that a once-a-year check wasn't motivating anybody.) Chauncey also dreams of a new incentive plan for his salespeople. The commission plan he has now, it turns out, is working against the company by encouraging salespeople to sell higher-priced weekend work, a time when the plant is already going full steam with the rush jobs common to the printing business.

Companies in the survey found the setting of pay levels to be their most difficult compensation problem; their second most difficult problem was figuring out appropriate long-term incentives or equity-participation plans. Mike Nebel, CEO of Vycor Corp., might well put that at the top of his list. Nebel has spent the past four years building up his facility-management firm in Washington, D.C. Now all the computer equipment is in place, the software is ready, some prime government work has been contracted -- and Mike expects to go national fast. What he needs are some long-term incentives to attract top management talent. He is considering giving equity participation, but he is still evaluating the long-term impact on the company.

Evidently, many CEOs are toying with one compensation idea or another. But a few have gone far beyond that stage -- and they have the results to show for it. Frankie Rich, for one, has developed an elaborate bonus plan, not just for top officers, but for all 49 salaried employees at Action Equipment Co., a $15-million Londonderry, N.H., distributor of light construction equipment. Rich, who once worked for an employer who didn't show any appreciation, "wants people to feel valued here." And so they do. Action Equipment distributes most of its pretax profit to employees each year who then give it back to the company in the form of a two-year "loan." The loan, plus interest, is paid back to employees every week in the form of a second paycheck. Rich's scheme raises a lot of questions: Wouldn't it be smarter to put the money back into the company? Isn't it risky to tie up the company's future cash? Maybe so, but you couldn't tell it by the numbers. Action Equipment, #18 on the INC. 500 list of America's fastest-growing private companies this past year, had a 7,013% gain in sales from its founding in 1980 through 1984.

 1 | 2 | 3  NEXT