Page 17 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 3

Reporting Relationship
Reporting relationships are used by some to determine who is an executive (e.g., the top three
organization levels in the company). The problem is the inclusion of “executive assistants”
and “assistants to” whose degree of importance to the position is better represented by their
job grade than their organization level.
Combinations
Because each of these five approaches has one or more disadvantages or shortcomings, the
best approach may be a combination of two or more definitions. For example, using the
definition of anyone in grade X or higher within the top three levels of the organization takes
pressure off job regrading and the need to include “assistants” and “assistants to.”

How Many Are Executives?

For many, an executive is probably an individual in the highest-paid 2 to 3 percent of the
company’s total employee population or the highest-paid 5 percent of the exempt portion of
the workforce. However, these percentages are only rough guidelines. The percentages would
probably be lower in centralized companies and higher in decentralized organizations. The
terms refer to where decisions are made in the organization. In centralized companies, deci-
sions are made at the very top of the organization. In decentralized companies, the ability to
decide is pushed down in the organization. Within each type, the organization can be struc-
tured by function, such that each major activity (e.g., sales) has its own head reporting to the
CEO, or it can be structured such that each unit represents a product or geographic area
and the major functional areas are contained within each unit. As layers of management are
added in the organization, decision making slows. The relative percentage of executives to the
company’s total employment is compared and contrasted with size and type of organization in
Table 1-2.
One might expect a higher percentage of executives in a capital-intensive than a people-
intensive organization because equipment rather than people dominate the lower levels of the
organization. In people-intensive companies, decision making has to be pushed further down
in the organization; otherwise, the company will be a slow, plodding bureaucracy. For these
reasons, capital-intensive organizations are likely to be centralized, whereas people-intensive
organizations are likely to be decentralized.

Company Structure
Revenue Size Centralized Decentralized
Large Low Moderate
Small Moderate High

Table 1-2. Percentage of executives to total employment relative to revenue and structure

Table 1-3 is a generalization contrasting the percentage of executives to total employment
in centralized and decentralized capital-intensive and people-intensive organizations. As one
would expect, the lowest percentage would be found in centralized, people-intensive organi-
zations (i.e., large workforces but all major decisions made by a handful of executives at the