Executive Compensation Mistakes: Stop Treating Everyone Equally

This is the first in a series on executive compensation, based on findings from our exclusive 2018-19 CEO & Senior Executive Compensation Report for Private Companies, which gathers data from over 1,600 private companies. It is the most authoritative resource in the U.S. for private company executive pay.

In your business, certain functions are more important than others. And fair or not, some people on your executive team are more important than others.

Their compensation should reflect that.

That may sound like common sense, but based on our research, we find that far too many companies do just the opposite, averaging out executive compensation across their entire team in search of “fairness.”

Those companies run big risks. They lose the ability to pay the key superstars that they need to really fuel growth. Or worse, they have a superstar on their team being paid an average executive salary—and he or she will leave for greener pastures.

The best strategy here is a blended mix of talent levels and compensation across the team, one that pays more for what’s more valuable. A superstar top-quartile executive (paid a superstar top quartile executive salary) is not going to be warranted in every position. Smart companies will differentiate having a great vs. a good person in certain functions—and will pay them accordingly.

There’s no set rule here—every company will need to figure out the right formula. For instance, if you run a mature private equity-backed manufacturing company that’s growing at a decent rate with strong cash flow, your CFO may be one of your most important executives. The CFO has to deal with bank covenants, make sure they don’t trigger any of the loan covenants and work on cost control initiatives. The importance of the role should warrant a “superstar” CFO and commensurate top quartile compensation.

Compare that to an early-stage biotech company, where the head of research and development may be one of the most critical positions to have a superstar vs. a good or very good performer. Your VP of sales and marketing? Maybe not as important in this type of organization.

Getting the formula right isn’t rocket science, but it will take some focus. You’ll need to weigh:

• What stage of growth your company is in (e.g., early stage and not yet profitable vs. mature)

• Your industry and business model

• Compensation benchmarks for your industry and specific roles

• Your ownership model (e.g. Venture Capital vs. Private Equity or Family Owned)

• Your overall balance sheet

Once you do that, you can figure out who on your team should be given a superstar salary and who just needs to be a good performer. Once you get there, you can better understand how you should divvy up the executive compensation pie by further benchmarking what rivals are willing to pay. This can also lead to potential opportunities to recruit superstar executives to fill specific needs.

In that regard, Chief Executive has released its annual CEO & Senior Executive Compensation Report for Private Companies. Chief Executive Research surveyed 1,631 companies in April through June of 2018 about their 2017 fiscal year compensation levels and practices, as well as their current and expected compensation levels for senior executives for the remainder of 2018. This kind of data can go a long way in helping you better figure out where you stand and make the right moves in doling out executive compensation.

Read more: Sorry, Bernie: New Study Shows Inconvenient Truth About CEO Pay