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April 19, 2010
Compensation 101: Executive Compensation

In a BLR webinar titled "Compensation 101: Essential Secrets and Strategies for HR Professionals," Paul R. Dorf outlined the main components of executive compensation packages, the influences on executive compensation, and how they differ between public and private companies.

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The total executive compensation package should motivate and reward performance related to company success. It should ensure a balanced focus between short and long-range goals. The typical executive compensation package has five main components:

  • Base salary
  • Short-term incentives
  • Long-term incentives
  • Supplemental benefits and perquisites
  • Employment and change of control agreements

There are many influences on executive compensation, such as:

  • Competitive market
  • Ability to link pay to overall company performance
  • Act as retention tool
  • Government regulations and tax and accounting rules
  • Significance of "GREAT" factor (Greed, Regulations, Ego, Accounting, and Taxes)

In order to design effective executive pay plans, several questions first need to be answered, including:

  • What are the company’s short and long-term goals?
  • What is the company’s stage of business development?
  • What is the condition of the competitive market?
  • What performance is the company trying to motivate?
  • How will compensation drive performance?
  • How successful have executive compensation programs been in the past?

Executive compensation varies in public vs. private companies. Executive compensation in the for-profit sector of publicly traded companies generally sets the standard in many ways for everyone else.

In public companies:

  • Pay plans consider impact on internal staff
  • Performance goals are defined
  • Regulations mandate disclosure
  • Competitive market plays significant role
  • Board provides objective oversight on executive pay
  • Compensation consists of both cash and equity

In private companies:

  • Individual deals can cause equity issues
  • Less defined performance goals
  • Poor communication on company performance
  • Pay impacted less by market
  • Pay controlled by insiders; not arms-length
  • Pay elements are often cash-based

Finally, supplemental benefits and perks can be added, and these can be almost as creative as people want. They're predominantly provided to executives and often comprise a significant component of the executive total compensation package. Some examples include: auto allowance, financial counseling, club memberships, employment agreements, and deferred compensation.

Paul Dorf is the Managing Director of Compensation Resources, Inc. (CRI). CRI (www.compensationresources.com) specializes in providing comprehensive Compensation and Human Resource consulting services. Dorf is responsible for directing consulting services in all areas of executive compensation, short and long term incentives, sales compensation, performance management programs, and salary admin programs.

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