Page 202 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

188 The Complete Guide to Executive Compensation

b. With a slope increase, if pay rate changes are greater relative to sales growth as sales
volume increases. For example, assume the average rate of increase in sales ranges
from 10 percent at the low end to 5 percent at the upper end of the curve, and the
average increase in compensation is 15 percent. The result, described in item 2a, is
repeated at the $100 million level of sales, but the increase in compensation becomes
more dramatic with increases in sales volume. This is highlighted in Figure 5-12. A
similar result is attained if sales increase at a constant percentage, but the rate of
compensation increases faster than sales.

Compensation
(Thousands)
$400
TY
LY

210
200

$100 $200
Sales Volume (Millions)
Figure 5-12. Sales vs. compensation, TY higher and ascending

c. With a slope decrease, if pay rate changes are lower relative to sales growth as sales vol-
ume increases. For example, assume the average rate of increase in sales ranged from
5 percent at the low end to 10 percent at the upper end of the curve, and the average
increase in compensation was 15 percent. Then the result described in items 2a and
2b might be repeated; however, the increase in compensation would be slowed with
further increases in sales volume. This is highlighted in Figure 5-13. A similar result
is attained if sales increase at a constant percentage, but the rate of compensation
increase drops with increases in sales.
3. If compensation increases at a rate slower than the increase in sales, the curve is lowered:
a. Without change in slope, if rate of compensation increase is the same at all levels. Thus,
assume the average sales increase at all volumes is 15 percent vs. a 10 percent average
increase in compensation. The $100 million division increases to $115 million, and
the average pay for division presidents at this level increases to $220,000. Similarly,
the $91 million division increases to $105 million, and the average pay for division
presidents increases from $182,000 to $200,000. Thus, the $200,000 reference has
been increased from $100 million to $105 million, reflecting a lowering of the com-
pensation curve, as shown in Figure 5-14.
b. With a slope increase, if rate of sales growth decreases as sales volume increases.
Therefore, assume the average level of pay increases 10 percent at all levels, but the
increases in sales range from 25 percent at the low end to 5 percent at the high end of