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.

Dynamark Securities Center Inc., with a 1,301% growth in revenues during the same period and placing #165 on the INC. 500 list, also came up with an unusual incentive plan. The firm, a distributor of home security systems in Hagerstown, Md., had a thorny problem to solve. Dynamark is made up of two recently merged companies, and is run by all four original owners. To keep things working smoothly, says chairman Ed Cusick, they had to devise a system that would satisfy all four egos. "Compensation for key people," Cusick says, "is based entirely on the contribution that the area they manage makes to overall corporate goals. It's not tied directly to profits, because it may not be one department's fault that another department fell off." He adds, "We've been able to attract the players into this merger because they have [what amounts to] the entrepreurial freedom to run a company of their own."

As for the future, the average CEO in the survey expects to give 12% salary raises to his top officers this year. Bonuses, more apt to be discretionary, are harder to predict. Many, however, will be based on sales and profit goals, and here our CEOs are an optimistic bunch. More than a quarter say they expect sales will increase by 21% or more for fiscal '86. If a common thread runs through the INC. survey, it is that most of the companies do look to the future with optimism -- and with the expectation of having the time and energy to try out new ideas. Close to half of the survey respondents said they were already thinking about future changes in compensation programs. A performance appraisal system was highest on their wish list of companywide plans, followed by annual incentive programs for all employees. Since almost a quarter of the companies had in fact made changes in their executive compensation programs this past year, there's every reason to believe they will act on their intentions.

The survey makes clear that the more revenues a company takes in, the more its top executives take home in salary and bonus. The fact is, the gap between the chief executive officers at the top and those at the bottom has widened over the past few years. In 1980, for example, CEOs of companies in the largest range -- $10 million or more in revenues -- paid themselves roughly three-and-a-half times as much as their counterparts in the smallest companies surveyed that year, those under $500,000. This year the multiple is close to four-and-a-half. But, as the CEO of a $1.2-million service firm in Michigan might tell you, averages are only averages. This CEO didn't take a salary at all the first year of his three-year-old business. Sometimes, to finance growth, he covered the payroll himself rather than borrow from his franchisor or the bank. Why the conservative approach? "Every business has its cycles," he says. "I don't want to be in a down cycle and owe the bank a ton of money.I want to build a business here."

Percentage of survey responses by company revenues: $10 million or more, 18%; $5 million to $9.9 million, 11%; $2.5 million to $4.9 million, 13%; $1 million to 2.49 million, 21%; $500,000 to $999,000, 14%; $250,000 to $499,000, 9%; under $250,000, 14%.

In comparison to their counterparts in other industries, chief executive officers of manufacturing companies traditionally have been the highest paid, according to INC. compensation surveys. This year they've been nudged out by CEOs in the wholesale/distribution business and by those in service. (For chief marketing officers, though, manufacturing still looks to be the best bet for earning a good salary and bonus.) The CEO of a $3.6-million manufacturing firm in Michigan may be representative of the times. He pays his COO $38,000, his CFO $32,000, and his CMO $33,000. His own take? Zero. When you own 90% of a firm that's losing money or just breaking even, as he does, you lose. There's been a lot of publicity about the lower-paying service industry overtaking manufacturing in the United States. Judging from the INC. survey, however, service companies pay just fine, at least on the executive level. The CEO of a $26-million service firm in Virginia, for example, says he has no complaints with his $225,000 salary and $400,000 bonus.

Percentage of survey responses by industry: service, 44%; manufacturing, 23%; wholesale/distribution, 14%; retail, 8%; construction, 6%; other, 5%.

Top executives of private companies do best in salary and bonus in the Northeast. That fits right in with the stereotype of the region as wall-to-wall factories. And how do other regions fit their stereotypes? Well, the Midwest brings to mind farms and factories; the West and Southwest, high tech and lots of space; the Southeast, textiles and more agriculture. But look closer, and you'll find some surprises. Consider one Alabama magazine publisher who responded to the survey. With a healthy $17.2 million in sales, this CEO pays himself $240,000 in salary and a $120,000 bonus to boot. That's more than four times the average for the Southeast. Then there's the CEO of a $42-million Salt Lake City retail operation who paid himself $100,000 each in salary and bonus. That made his take more than twice the average for his region. And even though Texas has been having problems lately, one Dallas electronics manufacturer isn't hurting too badly. The CEO of this $26-million company reports giving himself a $256,000 salary and a $90,000 bonus, nearly four-and-a-half times the region's average. So much for stereotypes.

Percentage of survey responses by region: Northeast, 22%; Southeast, 14%; Midwest 34%; Southwest, 11%; Far West, 19%.

The typical executives

Profiles of the top four officers based on survey averages


Total compensation $90,362 $69,743 $52,773 $59,799

Base salary $71,134 $55,803 $45,317 $50,356

Percentage receiving

bonus 56% 65% 54% 62%

Bonus as a percentage

of base salary 50% 35% 29% 34%

Percentage change in

total compensation +25% +23% +20% +17%


Age 45 41 42 41

Years with company 11 8 8 7

Percentage who are

also founders 69% - - -

Average equity position 67% 27% 27% 17%

The typical company

A profile based on survey averages

Total revenues $12,645,000

Employees 119

1985 payroll $1,741,000

Payroll as a percentage of revenues 13.8%

Percentage that are privately owned 92%

Executive benefits and perks

What benefits and perquisites

companies provided top officers


Company car & expenses 81% 70% 58% 72%

Supplemental life insurance * 74 69 66 61

Supplemental medical insurance * 52 51 52 46

Tax return preparation 51 34 29 21

Club dues & expenses 48 33 27 29

Personal tax & financial planning 34 25 22 16

Annual physical examination 31 27 30 27

Low-or no-interest loan 26 21 17 17

Supplemental retirement benefits * 22 23 22 20

Deferred compensation 17 15 16 17

First-class air travel 14 9 8 9

* Beyond customary companywide benefits

The executive bonus

How companies provided bonuses to top officers

Companies paying bonuses 78%

Type of bonus *

Cash 99%

Stock 7%

Other 2%

Basis for allocation of bonuses *

Discretionary 56%

Achievement of sales goals 21%

Achievement of profit goals 32%

Percentage of sales 6%

Percentage of profits 25%

Return on equity/assets/sales 8%

Companies with a bonus pool 25%

Basis for establishing bonus pool *

Discretionary 39%

By a fixed formula 36%

By a formula set annually 25%

* Totals may exceed 100% because of multiple responses.

Changes in executive compensation policies

What programs companies added or cut this year

Percentage of companies that made changes 22%

Added Cut

Short-term incentive plan 42% 30%

Long-term incentive plan 25 13

Health/retirement benefits 29 44

Perquisites 13 26

Special recognition/awards 24 9

Performance appraisal system 33 4

The most difficult issues

What compensation questions were found to be of greatest concern, in order of difficulty

1. Determining worth of job; setting pay levels

2. Determining appropriate long-term incentives or equity participation plans

3. Developing annual incentives/bonuses

4. Controlling benefit costs

* 5. Keeping abreast of tax law changes (developing tax-effective compensation plans)

* 5. Obtaining competitive compensation information

* Tied for least concern


This is the eighth consecutive year that INC. has conducted an executive compensation survey. In late February, we mailed a four-page questionnaire covering executive salaries, benefits, bonuses, and policies to a random sample of nearly 23,000 subscribers. Data Tabulation Services Inc., of Stoneham, Mass., compiled the 853 returns under the direction of special projects editor Sara Baer-Sinnott. To expand on issues covered in the survey, INC. hosted a roundtable discussion in April. Among those attending the session were five of the chief executive officers who responded to the survey; Peter T. Chingos, practice director of Peat Marwick Mitchell & Co.'s Executive Compensation and Personnel Consulting division; and Bruce Hanson, a Boston-based compensation expert with Towers, Perrin, Forster & Crosby, a management consultant firm.

Complete results of the survey, in which the confidentiality of all responses is protected, are available. To obtain a copy, send a written request and a check for $65 to INC. Executive Compensation Study, Attn: John Titus, 38 Commercial Wharf, Boston, MA 02110, or call (800) 372-0018. In Massachusetts, call (617) 227-4700.

CORRECTION-DATE: October, 1986


A chart in "INC.'s Annual Compensation Survey," (September, page 52) incorrectly shows executive compensation by company revenue. The revenue ranges "$5 million to $9.9 million" and "$10 million or more" were inadvertently reversed, as were the ranges of "$250,000 to $499,000" and "$500,000 to $999,999."