In Some Cases, Pay Really Should Be Unequal

Fair or not, in business, certain functions are more important than others, and their compensation should reflect that. Yet, Chief Executive’s CEO & Senior Executive  Compensation Report for Private Companies, which reports on compensation practices at more than 1,600 private companies, shows that too many firms do just the opposite, averaging out executive compensation across their entire team in search of “fairness.”

According to our research, companies across all revenue sizes—and more so at the higher end—report setting specific salary ranges for specific positions. The problem with this compensation strategy? You lose your ability to reward, retain and motivate superstars for key positions. And you need superstars to win.

But—contrary to what you may think—you don’t need all your top people to be superstars. The trick is to determine where you need them, pay what you need to pay to get them—and cut back where you don’t. A top-decile executive (paid a superstar top-decile executive salary) is not going to be warranted in every C-Suite position. For instance, at an early-stage biotech company, the head of research and development may be the most critical person, so you’ll need a superstar vs. just a good or very good performer. The vice president of sales and marketing? Maybe not as important in this type of organization at this stage of the game (though that could change when you’re ready to go to market).

There’s no set rule as to what that blend is or which position warrants top-quartile or decile compensation—every company will need to figure out the right formula—but a good starting point in getting the formula right entails weighing the following:

• Your company’s growth stage

• Your industry and business model

• Compensation benchmarks for your industry and specific roles

• Your ownership model

• 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. That, in turn, will enable you to better understand how you should divvy up the executive compensation pie by further benchmarking what your rivals are willing to pay. This can also lead to potential opportunities to recruit superstar executives to fill specific needs.

Find more best practices on executive compensation strategies.