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High performance pay: Pondering executive compensation

By Carolyn Heinze

When it comes to executive compensation packages, it’s easy
to become cynical if one reads too many headlines in the mainstream news.
Stories about executives that were responsible for a company’s demise –– only
to receive a sweet severance deal encompassing everything from enormous payouts
to company-sponsored yachts –– are all too common, even in this economy. But
all executives are created equal, and the fact is that while many of Corporate
America’s head honchos may be well compensated, they’re actually expected to do
a decent job.

Bill Coleman, formerly senior vice president of compensation
at Salary.com, is currently vice president of research and certification at
RetirementJobs.com. We recently called on him to discuss what organizations
should take into consideration when reviewing their executive compensation
packages.

Should all executives be
compensated differently from the rest of the employees in a company?

BC: It depends on what you mean by
“differently.” From a high-level view, a general way to look at it is the best
way to compensate all employees is to pay them for what they do, and what they
can control. Typically, executives are paid differently. The idea is that a high-level
person, an executive, can actually greatly impact the long-term growth of the
company significantly, or the long-term results. The way you make the most of
that is to have executives have more money at risk, and have more money tied to
longer-term goals. Whereas, your day workers, hourly workers and mid-tier white
collar workers don’t tend to have as much influence over where the business is
going, how it’s expanding, the big wins or the big losses. And so their pay
tends to have much less to do with the long term growth of the company, or the
long term results, and more to do with the shorter term, the day-to-day,
because that’s the kind of thing that they’re controlling.

What about bonuses?

BC: You should have properly
aligned, cascading goals and incentives so that the CEO’s bonus is based on the
performance of all the VPs, the VPs’ bonuses are based on the performance of
all the managers, and their bonuses are based on the performance of all of their
direct reports and so on. Wherever you are in the food chain, if you can see
how other people’s performance triggers your bonus payment or your rewards, and
how your performance affects other people’s, then you can communicate about
bonuses in such a way that you can say, “If I do better, it will make my boss
happy, it will make him or her get a larger bonus, and it should also deliver
more money to me. So we both win.” You don’t have to split it evenly; you just
have to feel like you’re getting rewarded for your contribution. When someone
else is getting rewarded for your contribution, you want to feel like you are,
too.

How have executive compensation
packages evolved over the last 10 years?

BC: There is a bigger discrepancy
between executives at different sizes and different types of companies. CEOs of
large tech and large financial companies make obscenely more money than CEOs of
small, brick-and-mortar, small manufacturing and small retail companies. It’s
hard to lump everyone together into one category of CEO or worse, executives.
Everyone thinks that “executive” is a label. But there isn’t a really good
definition of “executive,” and it means very different things in different
companies. There are executives at small start-ups that make almost nothing,
and then there are executives at small, privately-held businesses, like
plumbers, that make millions of dollars a year. “Executive” can mean anything.

Carolyn Heinze is a freelance
writer/editor.

Salary.com

www.salary.com

RetirementJobs.com

www.retirementjobs.com

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