Executive Compensation: How to Avoid Sabotaging Success

I’ve got a message for small to mid-sized businesses out there: your executive pay is all wrong.

Granted, most would think that executive pay is not a big problem, since it is high and on the rise. But while that may be true for larger companies, that’s not always the case for small to mid-sized businesses, and yes, it’s a problem!

I see this happen especially with family-owned businesses, or companies that generate less than $100 million a year. Executives in businesses like this are often personally invested in making sure that the company succeeds. When it comes to their pay, they may feel like they have to “take one for the team” and neglect their own pay package. What happens is that executive pay is often based on uninformed decisions and then rarely re-calibrated over time to adjust to changing markets or company growth. In the end, it’s an outdated executive compensation plan that doesn’t encourage leadership to fully engage with the business or stick around.

There are a three big factors that can take executive compensation off track:

1.       Base pay is arbitrary and not adjusted over time. Decisions about executive base pay are often subjective, and markets change all the time. Without regular follow up, base pay can quickly become out-of-date.

2.       Bonuses aren’t tied to performance. Not having a well-designed bonus program is one of the biggest mistakes I see with executive compensation programs. It’s either an entitlement program or, even worse, nonexistent. In either case, it’s a lost opportunity to align behavior with business objectives.

3.       Executive leadership isn’t recognized as integral to the company’s success.When executives leave small to mid-sized businesses, it hits hard. Not only is it far more difficult to replace that level of talent and the tribal knowledge they carry with them, but it does major damage to employee morale and the business as a whole.

Businesses, start treating your executives as though they’re irreplaceable. If you’re interested in making sure your key leadership sticks around for 2016 (and beyond), here are a few steps you should take:

 1.      Develop a strong pay methodology. Use it to guide your decisions around base, bonus, and long-term incentives, and calibrate it to the market and company goals. Make sure you regularly review and revise when needed.

2.       Develop a meaningful executive bonus program. Great bonus programs are designed to align executive behaviors to drive business objectives (revenue, net profit, etc.). If targets are met or exceeded, the executive is going to reap the rewards. If targets are missed, the executive feels it, and the company is efficient with its spend.

3.       If executives do decide to leave, make it a very tough decision. Encourage engagement and retention by building in vehicles that stagger equity or cash payouts over years. This makes it clear that if they choose to leave, they’re going to be leaving a good chunk of money on the table.

At the end of the day, having a solid plan in place will help executives stick around longer, focus their efforts on key business drivers, and strengthens the company’s success.

Clifford Stephan founder and principal consultant for OneCompensation has shaped and implemented compensation strategies for Fortune 100 and other emerging companies in some of the fastest growing industries.