Exploring Executive Compensation for Your Growing Business

Executives are important to your business in a number of ways, and are often the backbone behind huge growth, innovative changes, and the ultimate success of a great team. So, rather than offering a traditional set salary for the upper management of your growing company, you may decide to look into providing executive compensation packages to your most valuable assets. The basic function of this pay structure is to reward executives commensurate with their effectiveness in increasing the value of the company.

The growing disparity between executive and regular worker pay – as well as numerous overpayment scandals – has led to criticisms of the way executive compensation is calculated and the benefits it realizes for a company.

Executive Compensation At-A-Glance

Executive compensation was designed to reward a company’s top executives, including company presidents, CEOs, CFOs, VPs, directors, and upper-level managers. The components of executive pay packages are more complex than those of regular workers and are subject to different laws and regulations. These packages are usually part of a negotiated employment contract determined by the company’s board of directors.

• Payment packages are comprised of a number of different features: short-term incentives (bonuses), long-term incentives (usually regarding company stocks), salary, insurance, retirement, and additional perks like club memberships, cars, and corporate jets.

Trends

Due to changes in ways that executives are paid – including the addition of stock options to employment packages – the average total value of executive compensation packages has drastically increased over time.

According to the Economic Policy Institute, compensation for CEOs increased 725% between 1978 and 2011. In comparison, compensation for the average worker increased 5.7% over the same time period. For further comparison between executive compensation and that of average workers, consider the following:

• In 1965, the CEO-to-worker compensation ratio was 18.3:1.
• By 2000, the ratio had grown to 411.3:1.
• In 2011 the ratio had fallen to 209.4:1.

Criticisms

As evidenced by the above data, executive compensation has risen dramatically compared to that of the average worker – a trend that has been highly criticized in recent years in the wake of famous scandals at Enron (2001), WorldCom (2002), Global Crossing (2002), and Countrywide (2007).

• Other criticisms of executive pay packages are that the packages are excessive, lack transparency in the ways they are calculated and doled out, are controlled by the executives themselves rather than by company shareholders, and that the structure of the packages rewards high-risk behavior and even all-out failure.
• Short- and long-term incentives were designed to link pay with performance, so that executives could profit only when the company itself also profited. However, exorbitant severance packages and stock manipulation has made this correlation tenuous at best. According to Warren Buffett, “Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.”

Benefits

Despite the criticisms of executive compensation, companies argue that this lucrative pay structure is integral to attracting and keeping talented executives. A study by University of Florida researchers found that “highly paid CEOs improve company profitability as opposed to executives making less for similar jobs.” Having highly paid executives reportedly also allows companies to be taken seriously by others in the financial industry.

Innumerable laws and regulations have been promoted and passed in order to bring executive compensation rates in line with job performance and company success. The validity of this pay structure itself has been called into question, but it is unlikely to go away any time in the near future.

Despite the trends, criticisms, and public scandals, executive compensation packages remain the most popular way to attract and retain talented individuals into upper management positions.

Megan Webb-Morgan is a web content writer for Resource Nation. She writes about small business, focusing on topics such as business sales.