Executive Compensation… a Function of Philosophy, Budget and Data

by Rick Maher

Often leaders of businesses look at their compensation packages and they realize there is no strategy. They chose the pay packages for their team without a philosophy, without truly understanding the budget and they never looked at the data. The decision was “just made” to satisfy an immediate need.

Great compensation strategies are the direct result of a great philosophy on how the business is run, with laser focus on long-term budgets and access to statistically significant data. Here is how it should look.


PHILOSOPHY

Every business leader has a philosophy that they live by in all aspects of their business. Generally, we break this out into three main categories of thinking:

  1. Keeping up with the Joneses– The Joneses are a tough group as we always seem to be chasing them. Often, we do not know why we are chasing them, it just seems like to right thing to do. If it is good enough for them, well then it should be good enough for us. Here is the secret to know about this philosophy… the Joneses are doing what they do as part of their own strategy. Emulation may be a gamble because what works for them, may not work for you.
  1. Leader among peers and rivals – Usually when a business leader takes this approach, it can be felt in their business. Everything they do is meant to be a leader in their industry. The quality of the products and services, the marketing, the office space, the people, and so on. This philosophy should be supported in their pay structure as if they are leading an industry, typically they are paying for talent.
  1. Maintaining compliance – Although compliance is always a goal and must be achieved and maintained, often this may lead to a misalignment of pay strategy. Again, understanding the philosophy of the business is an important first step. Making the philosophy a part of the compensation approach is a great first step.


BUDGET

As an executive, there is usually one or two missions of the business and they are profitability and sustainability. Without these two, executives can find misaligned compensation plans which can ultimately do long term damage to a business.

It sounds silly to say, but compensation levels are directly tied to the budget. If the executive is looking at a budget today and makes a hiring decision, that could end up being a big mistake six months or in a year – there is likely to be a problem.  Budget discipline and long-term planning should be one of the pillars of any business’s compensation strategy.


DATA

Finally, there is data. How has the executive benchmarked the job and pay scale against similar positions in the same area, for the same sized business? For example, if you are paying 20% more for your positions than everyone else in your field, this could create an entire set of new problems if these were random decisions rather than part of the bigger picture.  The data is critical to either help formulate a pay philosophy or to make sure the executive is on target with their overall philosophy.

In summary, every business must determine their overall business strategy.
Once that is done, it is essential to connect philosophy, budget and data to support the strategy.

 

ABOUT THE AUTHOR

Guest Blogger, Rick Maher, is the CEO and founder of Turning Point Human Capital Management. Turning Point HCM is a Fractional Human Resource Consulting firm that is focused on solving the problems that keep business owners awake at night with an emphasis on compliance, employee challenges, policy/procedures and performance strategy.

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