Why Executive Compensation is Your Most Important Investment
Running a successful business, regardless of its size or industry, requires building and motivating a talented team. With that said, all "business assets" are not created equal when it comes to influencing the bottom line.
No one piece is more valuable to any team or business than skillful, impactful leaders. Leadership is the secret sauce that bridges the gap between talent and achievement. Leaders encourage and support employees, so they can maximize their own potential and contribute to the overall success of the business.
Accordingly, executive compensation should be a primary human resources concern for any business that hopes to grow and succeed in the marketplace. Without a thoughtful, comprehensive approach to executive compensation, businesses risk losing talented leaders (and other senior executives) who can ultimately make the difference.
Why Executive Compensation is More than a Salary
C-suite officers and other senior management executives bear a disproportionate burden of responsibility and accountability related to the business’ success, and therefore, must be compensated in a way that directly rewards them for achieving goals and driving initiatives that grow the business. Without an effective executive compensation strategy, which ties business success directly to individual financial gain, the potential reward does not offset the responsibility.
Salary represents the value of someone’s talent in the marketplace and the value the business places on the duties and responsibilities they perform for the business. Executive leadership is not just about skills and tasks, it is about vision, motivation, and management. An executive’s true value and likelihood of success cannot be fully measured upon commencement of employment, and that is why no attractive and competitive compensation package is built entirely on salary.
Consider the quid pro quo presented to executives when they join the business: “You grow the business and make it economically successful, and your own economic gain will be aligned with the business’ growth and success.”
This fundamental agreement between businesses and leaders cannot be honored in a completely salary-dependent scenario. Achievable, transparently structured bonuses and equity compensation must be in place for each executive’s compensation to grow with their success and impact on the business.
Executive Compensation in the Talent Marketplace
All-star executives know what they are worth, and they also know that many companies are willing to make them an enticing offer up front (usually in terms of salary that compares to larger companies or equity with aggressive growth projections in early-stage scenarios) to lock them down. Hiring and retaining talent in a competitive market is challenging, but by developing a compensation strategy that aligns the overall goals and growth objectives of the business with each executive’s personal financial gain can result in attracting and motivating great leaders.
Designing competitive compensation packages looks different for every business, but here are some aspects that are important to focus on:
- Balance – Base salary, bonus opportunities, and equity are all important aspects of an executive compensation package, but the key for both the business and the executive is that the three are balanced in a way that maximizes the return for both parties and leads to mutual success. As you prepare a compensation package for any executive, think about what the “mix” of compensation looks like to them and the business now, a year from now, and potentially three or five years down the road.
- Perks – Each business has something unique to offer executives, whether it is a company car, chef-prepared lunches, access to a great workout facility, or tickets to popular events. When hiring executives, unique perks help businesses stand out from other employment opportunities with equivalent financial compensation.
- Fairness/Consistency – Salary, bonus opportunities, and equity participation must be structured in a way that is both horizontally and vertically logical, so businesses can value new and existing employment relationships equally. If not, the compensation strategy and philosophy could easily ruffle feathers and lead to dissatisfaction among the C-suite, senior management team, and members of the rank-and-file.
Without a competitive executive compensation strategy and philosophy that motivates leaders to think big, manage effectively, and achieve the established business goals, businesses can never truly maximize their potential. Regardless of the talent level of any individual , the quality of the product or service, or the strength of the brand, no business can continue to grow or remain profitable without executives who feel valued, motivated, and positioned for success.
Are you interested in learning actionable strategies to build high-impact executive compensation packages that retain top talent and drive business performance?
I will be a panelist on the upcoming webinar Everything You Need To Know About Executive Compensation.