Executive Pay–It’s Not About That Base

July 6, 2017

In our 2017 Hot Topics in Executive Compensation Survey, only 15% of participating companies indicated that they have an effective executive salary increase process. The other 85% of participants indicated having at least one of the following challenges:

  • Small merit budgets
  • Competition within peer groups
  • Differentiation
  • Performance assessments vs. actual increases
  • Executive perception of entitlement
  • Pressure to increase above target market position
  • Balancing small increases with large incentive payments

In fact, forty percent (40%) of the respondents indicated facing three or more of those common challenges with their base salary administration for executives.  The most frequently cited challenge is the small budget amounts they have to work with, but staying competitive with peers and differentiation are the challenges that round out the top three most commonly found.

What’s so special about the 15%?

For this blog, we wanted to do a deeper dive to analyze the attributes of those organizations who stated that executive salary increase process was not a challenge. The objective is to provide insight behind those responses to see what learnings could be of benefit to all.  Wouldn’t it be great to know how these organizations have removed the challenges of executive salary administration? To do this analysis, we looked at several attributes such as:

  • Organization demographics
  • Pay philosophy
  • Pay mix
  • Recent salary budgets

Here’s what we found.

Demographics

There were a total thirty-four (34) companies that indicated ‘no challenges’.  Seventy-three percent (73%) are publicly traded companies, which is only slightly higher than the percentage of public companies in the overall sample (66%). That difference alone is not significant enough to suggest that public companies are more likely to have fewer challenges with salary increase process effectiveness.

The size of companies in the two groups is also consistent.  We compared both revenue and market capitalization (public company data only), and find that the companies with ‘no challenge’ are right in the middle of the pack.

Pay Philosophies

We used our CG Pro ProxySearcher tool to read the actual compensation philosophy statements from the published proxy statements for the publicly traded companies. Here again, we couldn’t find any appreciable differences among the companies with ‘no challenges’ compared to others.  The consistent themes we noted were:

  • Attract, retain and engage talent
  • Pay for performance

But these themes were equally present across both groups.

Pay Mix

Perhaps the reason there’s ‘no challenge’ with base salary administration at some companies is because they have a different mix of total compensation? If for example, one group uses base pay significantly more than the other, we might assume that challenges are higher where it is a more important slice of the pie.

To test this hypothesis, we again used our CG Pro software to analyze pay mix of the public companies.  We utilized the built-in comparison feature to look at this group of companies compared to an even larger index of companies, the Fortune 500. We do see some slight difference in the use of Stock Options for our peer group of ‘no challenge’ companies, but otherwise, the mix of base salary is about the same.

Recent Salary Increase Budgets

Ok then, maybe the reason for the ‘no challenge’ is they’ve had bigger salary budgets to work with?  As it turns out, the opposite seems to be true.  We compared the responses about 2017 merit increase awards and whether this year’s increase was larger, smaller or about the same as prior year. Across all responses, the companies who indicated ‘no challenges’ were lower in comparison to companies who indicated at least one challenge with their base salary increase effectiveness.

 

Conclusion

Perhaps we’ll never know the full story behind the intent of those 15% of participants who stated that executive base salary administration is not a challenge for them. Nothing appears glaringly different in terms of their demographics, pay philosophy, pay mix or recent merit increase awards when compared to the other respondents.

The best logical reason we can surmise from all this analysis is that the response to the question of challenges with salary increase process effectiveness is a matter of perspective. The question in the survey is a qualitative sentiment and a respondent’s point of view could be; relative to other challenges they face in other areas of executive compensation and governance, their experience with base salary increase process might not seem all that challenging. To them, it's not all about that base.

The Hot Topics in Executive Compensation contains information on a wide range of compensation and governance issues faced by over 230 organizations.  Contact us to learn more about this Hot Topics survey and how you can purchase a copy of the full report.

 

 

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