Compensation: Executive Comp in Smaller Companies

So, I have had several emails asking about executive compensation in smaller companies. Apparently, some can see the detail in larger companies, but believe that the issues are fundamentally different in smaller and mid-market firms.

You probably don’t want to hear this, but base compensation is what it is, and should be close-to-comparable for a given accountability. Regardless, for the most part, of company size. Incentives and perquisites vary, of course, but again, base compensation simply is what it is.

Smaller private companies have long faced these issues regarding competition for executive talent, particularly with compensation. Fortunately, many public firms are beginning to curtail their biggest draw — equity options — since FAS 123Rnow requires that they expense them. So, don’t just throw up your hands.

Realize that the way to deal with executive compensation is via a well-thought plan, not simply a “base plus bonus” scheme. What do the investors/owners want from the company? Increased shareholder equity?? Relative stability?? Cash flow?? Net operating income?? Identify this first, since it will be your critical metric. Every plan starts with a purpose.

The key to keeping execs on target is a well-designed executive compensation plan.

On average, about 50% of a private CEO’s compensation is determined by how well his/her company performs within the chosen metric(s). The rest of the senior staff should still be north of 30%.

Consider, in addition to metric-based incentives:

• Modified gainsharing or goal sharing (for management)
• Deferred compensation (unfunded)
• Increased vacation/PTO
• Reimbursements for clubs, exercise facilities, etc.
• Conference attendance, with spouse allowance

There’s a ton more to do. Approach the effort holistically – you can’t get there with just a “base-bonus” philosophy.

Hope that helps some…