How to Determine the Right Amount of Executive Compensation
Also referred to as executive pay, executive compensation comprises the remuneration packages and benefits such as salaries, insurance coverage, and retirement benefits given to executive-level employees. In 2019, the average executive pay in the U.S. was $21.3 million, according to the Economic Policy Institute (EPI). While the figure varies from one company to another, a proper executive compensation evaluation can enable you to determine the most appropriate amount for your executives. Some of the strategies you can use to evaluate executive compensation in your organization include the following:
- Benchmarking from Industry Peers – This involves analyzing how other companies from different industries compensate their executive-level employees. While this may not give you an exact figure of how much you’re supposed to pay your executives, you will most likely find a suitable range of compensation. Take note that established companies and industry leaders may pay their executives way higher than the average. In other words, as you benchmark, be sure to consider the limitations in the process to avoid overpaying your executives.
- Comparing Pay and Performance – This is an accurate way of evaluating compensation since it ensures that executive-level employees receive payment according to their performance. Most high-performing companies use this approach to determine how much their executives receive. For this reason, their figures keep shifting from one year to another depending on the changes in the company’s stock performance. In fact, per the Society of Human Resource Management (SHRM), compensation designs for high-performing companies evolve as the company grows. Considering the accuracy and fairness in this approach, it is prudent to pay your executives based on how much they have contributed to the growth of the company as this also motivates them to put in more effort.
It is worth noting that some executives receive bonuses, incentives, and other benefits even when they fail to meet the set performance targets. This is especially common in organizations that base their executive compensation on peer comparison rather than key performance indicators (KPIs).
Types of Executive Compensation
According to the Harvard Business Review (HBR), how much you pay your executives may not matter compared to how you pay them. That said, once you’ve figured out how much executive compensation is worth for your particular company, consider these types of compensation:
- Cash Compensation – This involves paying your executive employees salaries and other benefits in cash.
- Long Term Incentive Plans – This refers to the policies aimed at rewarding your executive employees based on the goals achieved.
- Executive Perks – These are the luxurious benefits that executive employees enjoy in a company. They include VIP treatment, private jets, and travel reimbursements.
- Retirement Benefits – These are the packages that executive members receive when they retire. Examples of retirement benefits can include health benefits and pensions, among others.
- Deferred Compensation – Here, you can defer your executives’ compensation until a later date, mainly for tax purposes.
- Option Grants – This involves giving your executive employees the right to purchase a certain number of shares at a set price, also known as grant price.
To come up with the right executive compensation, you can form a compensation committee that will discuss and settle on what is best for both executives and the company.
To ensure the executives in your organization feel fairly compensated, use these tips to evaluate executive compensation. Alternatively, you can seek expert advice on how to evaluate executive compensation. Are you looking for a consulting firm for salary, legal, and other human resources issues? Contact the professionals at McKnight Associates, Inc. We are ready to offer you hands-on human resources consulting for colleges, universities, medical centers, and organizations of all sizes.