Designing an executive pay plan requires a lot of facets to be considered, not the least of which is: how high should executive pay be? But the exact amount is far from the only consideration.
How should an organization decide to pay executives? Is there a formula to use? Unfortunately, it’s seldom that simple, and getting the executive pay strategy right can affect the competitiveness of the organization by affecting who will be willing to work for you.
Executive Pay Plan Design Considerations
“I think the in past it’s been a pretty much plug-and-play: you go to your survey, you open the book, you find the title, you get your number, and you’re good to go—but we all know that that’s just not the case anymore.” Mary A. Rizzuti explained in a recent BLR webinar.
While understanding the competitive landscape is certainly a facet, there are many more considerations to take into account. In fact, the first question you should ask is: How successful have the executive compensation programs been in the past? If they’re successful, they may simply need updated. If you don’t already have an executive compensation program in place, start with these questions:
- What are the company’s short-term and long-term goals? Long term goals should coincide with the company’s strategy. It might be 3 years, 5 years, or even 10 years, depending on your strategy. Try to ensure the executive pay strategy is in alignment with the long-term goals of the company and what is going on in the market.
- What is the company’s stage of business development? A startup will have different needs than a well-established business. For example, a startup may not have as much cash available; they may offer more long-term incentives for when more cash is available instead of short-term incentives that require cash quickly.
- What is the condition of the competitive market? The company has to be realistic in terms of matching up strategy with what the market requires. Using market data is the first step.
- What performance is the company trying to motivate? “Do you want revenue growth? Is it client retention? Is it productivity and efficiency? Again, that is going to come from your strategic plan.” Rizzuti explained. This could vary between different groups within the organization, but needs to be considered for any executive—the executive pay structure needs to motivate the actions that will help the company achieve its goals.
- How will compensation drive performance? Each of the pieces needs to be put together. It’s not enough to be able to pinpoint what actions you’d like to motivate, there also has to be a clear line linking the compensation to those actions in a meaningful and measurable way.
For more information on creating an executive pay plan, order the webinar recording of “Executive Compensation Studies: Setting the Right Pay Level for Your Organization.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Mary A. Rizzuti, CCP, PHR is a principal and senior consultant with Compensation Resources, Inc. (CRI) . With over 15 years of compensation experience, Rizzuti serves as project manager for consulting projects. She also leads CRI’s Training Institute, delivering customized compensation and human resources training for senior leadership and human resources professionals.