Company arrives at fair compensation package for CEO by comparing his salary with salaries of other local CEOs.
Back in 1979, when Bruce Bowers started his company, TRC Industries, a Stow, Ohio, silicon-rubber manufacturer, he paid himself a subsistence salary. His bankers objected. "If the company went bankrupt, they were afraid I wouldn't have any financial assets of my own for them to go after." So Bowers turned to his board of directors for guidance.
They came up with a two-part compensation package: a base salary, which the board pegs to what CEOs of similar-size companies in northeastern Ohio earn, and an annual bonus, fixed at 25% of TRC's pretax profits, which board members feel is a typical CEO profit incentive at privately held growth companies in the region. (To learn how much CEOs of similar-size companies pay themselves in your region, do what TRC's board did: consult local city magazines and regional economic-development organizations.) Bowers and his wife also own 100% of the company's stock, which provides another long-term financial incentive.
Regional companies seemed a good point of comparison, since most of the rubber companies in Bowers's market are large public companies. "My family's financial needs are tied to the area in which we live, where expenses are relatively low," says Bowers.
As for the bonus, which has remained at the 25% level as TRC has grown to a $4-million company, the board mentions that commitment in its board minutes each year. "We never wanted the IRS to come to us and say after a particularly good year that my bonus had amounted to unreasonable compensation," Bowers explains. "This way, we set a precedent early on and built a long paper trail to support it." Although the bonus fluctuates in value, says Bowers, "it's a great motivator to perform." -- Jill Andresky Fraser