Advice from managers in different industries "challenges you to adapt it to your own situation," says Brian Collins, the CEO of Commonwealth Inc. Warehousing and Distribution, a $5-million company and a participant in roundtables sponsored by the Cincinnati Chamber of Commerce. The wild card in the compensation game, Collins has learned, is how you choose to define your company. "You'd be surprised at how many owners don't know what, exactly, they do," he says.
Your managers. Mike Watson, the president of Three Springs, in Huntsville, Ala., an $18-million provider of residential treatment programs for emotionally disturbed children, is a pushover for executive-compensation articles in trade magazines and business-management newsletters. Whatever he misses in the popular press is clipped and copied by his assistant (or a manager) and circulated to all managers and curious employees.
The most lasting bit of advice Watson has clipped: "It's all about evaluating yourself and your people equitably," he says. "The best evaluators are your customers, and my customers are my employees." That's why Three Springs' eight managers huddle every November to evaluate Watson's performance. The information helps the board set Watson's annual pay. "They have a bunch of criteria," says Watson, pointing to tangible personal goals such as entering a new market or forging a strategic alliance. "They know what I had planned to do, what I did, and what I didn't do."
Comparisons with public companies. Public information is at your fingertips. Raymond Smith, president of WinterBrook Beverage Group, a $25-million marketer and distributor of sparkling-water drinks in Bellevue, Wash., pores over the prospectuses and disclosure documents of a cross section of midsize beverage companies -- mostly those in the $15-million-to-$20-million range -- comparing the ownership stakes, salaries, and bonuses of profitable competitors. "I look at what they're trying to achieve," says Smith, referring to competitors' marketing and financial strategies and the timing of their product debuts, "and I compare those with what I'm trying to do." Studying the compensation of chief executives at Coca-Cola and Pepsi carries a psychological benefit: the six- and seven-figure sums inspire him to keep building value. "Knowing what the big guys make sets an upper limit," Smith reasons. "I already know how low I can go!"
Similarly, Hot Topics' Madden reviews every offering prospectus in his specialty retail niche, since there may be only 10 to 15 a year. "I check what they're paying, particularly in long-term compensation, in the event that we go public," he says. Meanwhile, Madden taps his venture partners for pay information on competitors. "If they've done lots of deals in your industry, have them do a portfolio search for you to let you know -- confidentially -- what specific CEOs make," he says.
Industry consultants. If you're short on time, consultants can be a breezy one-stop shop. Chief executives who tap them say the quality and thoroughness of their surveys make them reliable, if expensive. Art Allen, CEO and 100% owner of Allen Systems Group, a $23-million computer-software seller in Naples, Fla., uses Warren Culpepper and Associates, in Atlanta. "Its compensation resources are known throughout the software world," Allen says. "What's most helpful are the salary and bonus guidelines for every position in the company." Poll peers in your industry for the names of good consultants.
Compensation specialists. They're cheaper and more plentiful than ever. "When CEOs use accountants for salary issues, they're missing the boat," argues Joseph Shurance, the president of $3-million Executive Business Services, in San Diego. That, of course, is contrary to what many CEOs believe. Shurance by no means distrusts accountants -- he has two of them. But when it comes to pay issues, he wants someone who takes his personal financial interests to heart. "The goal of an accountant is to maximize the wealth of the company," he says, "while the goal of a specialist is to maximize owner wealth by looking at how compensation fits into the overall company-growing strategy."
When Shurance bought out his partner, last year, his compensation pro was with him every step of the way. "Our accountants couldn't have done an adequate job of attaching dollar values to people during the process," says Shurance.
Classified ads. Call him crazy, but when John Schirle Jr. wants to know the going rate for a CEO in his industry and geographic market, he leafs through newspaper ads. Schirle, the president of $22-million Plus Marketing, in Detroit, might even call the company and ask to speak with the current CEO. "Usually, we wind up talking about compensation -- or lack of it," he says.
American Compensation Association (ACA). This Phoenix-based clearinghouse of compensation and benefits information is geared to CEOs of public companies, but it also offers publications, article reprints, conferences, seminars on tape, and surveys that growing companies can can use. Contact the ACA (602-922-2020; fax, 602-483-8352) for a catalog.
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How Can You Trip Up?
You take out too much money, or you don't take out enough. You place the good of the company above your family, or vice versa. In talking with compensation experts and CEOs, we got an earful about mistakes of omission and mistakes of commission. Although we also heard about a number of technical issues to consider, especially from the experts, we put those aside, since your own advisers can give you advice for your particular situation. Here, then, are the five cardinal sins of CEO compensation:
1. Cheat yourself in the early going. Jeff Hirsch was one of those CEOs who for years put in sweat equity but didn't give himself a regular salary or set up a deferred-compensation program. But martyrdom came back to haunt him in 1992, when he hired a professional manager of operations to help grow his then three-year-old Los Angeles-based software company, Xymox Systems Inc. Somewhat grudgingly, Hirsch offered the manager an equity stake. "It was like taking in an investor -- except we had to pay this attractive salary, too," says Hirsch. "This manager walked into a significant position, a great situation -- one my partner and I had created and were still waiting to benefit from." Although he claims the exchange was "just another business transaction," Hirsch admits he was unhappy knowing that the modest amounts of cash he had earmarked for himself would land in another's pocket.
