Page 210 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

196 The Complete Guide to Executive Compensation

Use of Average Increases in Pay
Many are confused by apparent conflicts in average increases in executive salaries as report-
ed by different surveys. For example, three different studies might report figures of 8, 9, and
10 percent and yet be completely compatible.
Taking them in reverse order, the last study may have examined the average increases
only of those who received adjustments, whereas the second might have examined the aver-
age increase in all salaries. Thus, if 90 percent received an average increase of 10 percent, the
data would be comparable to the 10 percent number reported by the first. Finally, the first
study might have been looking at the increase in payroll after one year. This is similar to the
second study except that it is “net” of all additions and terminations to payroll as well as
measuring the promotional adjustments. To the extent replacements are hired at lower pay
than those being replaced and/or the workforce is being expanded at a pay level below the
average payroll (i.e., total payroll divided by number of employees), this will not only offset
promotional increases but may offset a portion of the average increase in salaries as well.
Therefore, when examining reported average increases in pay, look closely at the defini-
tion(s) used. In the above illustrations, the results were comparable; however, a different
company mix, the timing of the study, and poor survey techniques might have resulted in
widely divergent data in apparently comparable studies.

Must All Jobs Have Grades?
Formal minimums and maximums for jobs are more likely to be found in mature organizations
than those in the threshold or emerging stages. However, even some mature organizations have
no official grades for their very senior executives. Their position is usually that grades at that
level have no meaning since compensation is very personalized. Perhaps. But compensation
committees (as will be discussed in Chapter 10) are showing increasing interest in knowing
whether such individuals are overpaid or underpaid in relation to the market. Once the job has
been placed in a grade based on a study of competitive levels of compensation, such a concern
is rather easily resolved. However, those totally flexible, ungraded situations are much more
difficult for compensation committees to address. Furthermore, the lack of grades is totally
inconsistent with a philosophy of adjusting individual pay in relation to performance and com-
petitive pay levels. Without a grade reference, the latter is not readily apparent. Therefore,
lacking a formal structure that is updated for market conditions, the pay of individual executives
is more likely to be adjusted in relation to the average increases reported in the marketplace
than on the basis of individual contributions. In such instances, an executive’s level of pay is
more likely to be a function of length of service than degree of accomplishments. Rather than
delete job grades altogether, some organizations have gone to broad-banding. Typically, four to
six (maybe more) grades are collapsed into one grade or band, as shown in Figure 5-18.
Therefore, instead of having 25 to 50 grades, a company may have 6 to 10.
A move to broad-banding is logical at the time a company is de-layering the organization
and emphasizing cross-functional (horizontal) movement, not hierarchical (vertical) struc-
tures. Broad-banding minimizes issues of promotions or demotions, facilitating movement.

Must All Grades Have Jobs?
Some are troubled when they examine a pay structure and find grades with no positions.
Their immediate response is to request that the structure be collapsed to eliminate these