Page 197 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 5. Salary 183

Some suspect that this approach brings a level of analysis to the issue far greater than the
data warrants or than the executive is interested in attempting to absorb. Nonetheless, it is a
device that enables a refined method of job matching.

What to Survey
Having determined what to survey and what jobs to include, determine next what questions
to ask. At the minimum this would include the following: number of incumbents, salary
structure, average actual salary, short-term incentive maximum, average actual short-term
incentive pay, and total salary and short-term incentive. It may also be appropriate to include
questions on long-term incentive plans; Chapter 8 will describe how to place a value on such
plans. The inclusion of perquisites may be appropriate for very senior positions. They are
usually common to certain levels of positions. Thus, if several division-president positions
were surveyed, it would not be surprising to find they were all eligible for essentially the same
perquisites. A study of employee benefits limited to retirement and survivor protection may
be helpful in identifying companies significantly above or below the average in level of
coverage.
For those interested solely in the highest-paid five executives within an organization, the
company proxy statement may be sufficient. But be sure to read the footnotes very carefully
as well as obtain at least the previous year’s copy, due to the relationship of the respective
columns.
It is important to remember that if a company has few or no incentives, it will be estab-
lishing a less-than-competitive position when comparing its salaries only with the salaries of
other companies. It must attempt to include salary and incentive pay of the community in
order to be competitive. Since incentive-paying companies typically pay more than nonin-
centive companies (one would hope only during profitable years), it may be more logical to
average the short- and long-term incentives paid in the community over a period of time to
reduce the fluctuations.
Plan payout periods are important to know in long-term incentive plans, since one com-
pany may pay interim awards annually, while another pays only after three full years. In two
of the three years, the first company will appear to be paying more than the second; in the
third year, the second company will appear to be paying significantly more than the first
company.
If a regression analysis (single or multiple) is going to be performed, the appropriate data
is also required. As indicated earlier, this might include sales, assets, profits, stockholder
equity, number of employees, age, and length of service for the job incumbent.
How to Analyze

Essentially, there are two basic approaches to analyzing the data: average pay only or average
pay in relation to one or more independent variables. Table 5-11 shows an example of average
pay only. In this hypothetical study for a CEO, we see that the average total compensation for
the community is $1,986,300 vs. $1,878,000 for the Brucell Company. Note in this example
that Brucell would be even further below the average except for its long-term incentive plan.
All in all, it’s not too bad. But note the wide range in total compensation reported. Is the
average really meaningful? Let’s examine the same data in relation to sales volume. As shown
in Figure 5-8, a significant amount of this variation is explained by the relative size of the
organizations. (Brucell is identified by a star.)