How CEOs evaluate, review, and reward their key managers and employees.
It isn't difficult to explain the widespread interest in questions of compensation. Founders of growing companies often lack a context in which to measure their own company's compensation practices and policies. And, more personally, who doesn't like to know how their own paycheck ranks in the larger scheme of things?
With our annual survey on executive compensation, INC. has attempted to satisfy this curiosity since 1979, our first year of publication. Throughout this period, we've published hard numbers on what chief executive officers of private companies pay themselves and their top people, along with details on benefits and perks -- their bonuses, the cars they drive, and who gets to fly first class. This year we've added a new dimension to our compensation package. To keep up with the information needs of people who are running businesses, we're furnishing more data than ever on companywide pay practices. We're also providing material on how executives go about making the nitty-gritty decisions that shape their overall pay strategies. How, for example, do they review employees? Are salaries kept secret? Who makes the final decisions about earnings?
You'll find the answers to these and other questions on the pages that follow.
* * *
How can you tell if the size of your payroll is right for the type of business you're in?
Patterns do emerge from our survey. For example, the percentage of sales that the median wholesale and retail companies devote to salaries, wages, and other forms of compensation is only about half that of manufacturing and service businesses. Wholesalers, as a group, tend to pay out the least (13.2%), while service businesses pay the most (35.6%).
Since small, growing companies are often in specialized niches, however, the relationship between payroll and revenues depends on a number of factors -- everything from the nature of the market to plans for expansion.
* * *
If industry comparisons aren't relevant, is there anything else you can look at?
Company size. But it, too, is a weak indicator. Bigger companies -- more than $10 million in revenues -- often spend a much smaller percentage of their resources on payroll than smaller ones, but beyond that, there's little the survey points up. There are huge variations among similar-size companies. Many $2-million businesses, for instance, have payrolls of less than 20% of revenues, while others pay out in excess of 50%; the median for all the businesses we surveyed is 27%.
* * *
Benefits are an ongoing issue. How can a company tell whether it's in the ballpark?
Interesting clusters show up in the survey within industries and by size. Manufacturers, for example, tend to devote the highest percentage of their payroll to benefits; retailers spend the least. The median manufacturing business spent 10.2% of payroll on assorted benefits in 1988; the median retailer, 5.6%. Service and wholesale companies fell in between.
As for size, the bigger the business, the more benefits it offers. Of surveyed companies wtih revenues of more than $10 million, over 90% offer life and medical insurance, and about 60% offer dental and short- and long-term disability coverage.
* * *
What about companywide retirement benefits?
Companies surveyed offered retirement benefits to a greater extent than we expected. It's no surprise that fewer very small companies -- those with revenues under $1 million -- offer benefits than bigger ones, but a third of these small companies do have some kind of retirement plan. Younger companies -- under five years old -- are less inclined to have programs in place than their older counterparts. But we found plenty of exceptions. One was AMS Inc., a year-old multilevel marketing company in Oklahoma City, where several of the 10 full-time employees are being offered stock options. "For us, it's a way of preserving cash," president Dennis Loney says, "and we hope it generates loyalty."
Once businesses pass the $1-million mark, retirement benefits such as profit sharing, 401(k) savings plans, and stock options become more common. About 80% of all companies we surveyed with sales of at least $5 million offer retirement benefits of some kind, and many offer more than one.
* * *
How common are employee performance appraisals or reviews?
Performance appraisals are a lot more embedded in the small-business culture than we had imagined. Of course, at companies with few employees, many executives complain that performance reviews are too formal. Typical are the comments of Robert Jordan, cofounder and CEO of International Demographics Inc., a 10-person business in Houston. "At our company," Jordan says, "commu-nication is an ongoing thing." He experimented with employee appraisals several years ago but found them too cumbersome. "We like to confront problems whenever they come up," he says.
Still, half the executives at companies with sales of less than $1 million say they have companywide reviews. And the proportion grows as companies get larger: 82% of the companies with sales of $5 million and more say they conduct reviews. Nor do performance reviews appear to be one of those management fads that come and go. No matter what business they're in, most managers tell us they've been doing reviews for four years or longer.
* * *
Who generally does the reviews? And are they oral or written?
Among the companies in our survey, reviews are occasionally done by committees or by an employee's peers. But mostly managers and CEOs conduct reviews, and the involvement of CEOs is fairly consistent across industries. There are differences by company size. In those with sales of less than $1 million, for example, 66% of the CEOs are involved in companywide reviews. By the time companies pass the $10-million mark, CEO involvement drops to 27%. By then most of the responsibility for the appraisals shifts to managers; at $10 million, their involvement rises to 90%, up from 49% in companies with revenues of under $1 million.
