Page 208 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

194 The Complete Guide to Executive Compensation

Adjustments reflect a company’s beliefs about increases at varying job levels in the mar-
ketplace. For some, this is a simple action of adjusting the structure by a specific percentage
(e.g., 8 percent) based on what the nonexempt employees have received in the way of increas-
es. For most, it is a more sophisticated analysis.
Assume the company last adjusted its structure September 1. Further assume that all the
survey data suggests that lower-management jobs have increased at the rate of about 9 per-
cent, whereas top management has increased by 7 percent. One could stop at this point and
develop a new schedule, with increases of 9 percent at the bottom tapering consistently down
to a 7 percent adjustment at the top. While such an action per se probably will not cause any
problems, continual movement of this type will continue to compress or reduce the relative
differential between executives and their subordinates, as shown in Figure 5-17. The impact
of such a result is that the pay incentive to accept promotions is reduced.

$

7%
Proposed Pay
Midpoint Line

Current Pay
Midpoint Line
9%

Job Value
Figure 5-17. Structural change in midpoints

Thus, flattening the curve and introducing compression must be examined when adjust-
ing the structure. Empirically, it seems that differentials of 20 to 25 percent are needed
between supervisor and subordinate to provide sufficient financial incentive for a subordinate
to accept the responsibilities of supervisor. Such evidence has been seen in production oper-
ations—line supervisor and skilled operator. One could argue that because of the progressive
tax structure and the increased visibility (and resulting risk of failure) of higher-level posi-
tions, this relationship should increase progressively through the pay structure, and there is
some evidence at very senior levels of management to support this hypothesis.
Pay compression at the top of the organization, which was a concern in the 1960s and
1970s, seems to not only have disappeared but also to have been dramatically reversed in
recent years, with CEO pay increasing far more rapidly than those lower in the structure.
Position vs. Survey Community

In developing a structural adjustment, consider where the company wants to be positioned
competitively, and at what point in time. Many companies simply indicate they want to be
competitive (or about equal to the average) with the companies in their surveys. Others will