Executive Investigator - Four Executive Pay-Setting Criteria

Tracking and Analyzing Executive Salaries, Bonuses, and Perks

Friday, July 18, 2008

The Economic Times of India suggests giving directors a more complete set of tools to set executive pay with:

Market Assessment
Internal Pay Equity
Wealth Accumulation
Profit ‘set-aside ’

Market assessment [is the] first step in conducting a market assessment is ‘Peer Group Selection’ in light of the level of role complexity and job worth differences. The appropriateness of the peer group is an important issue that is raised constantly by members of remuneration committees.

Some say that CEO pay should be roughly twice the amount paid the next management level, and that a differential by a factor of two is ‘felt fair.’ There seems to be something to this ratio, in that the difference in every ‘real’ level of work would lead to a doubling of pay.

Another approach to determine executive pay is to set wealth accumulation targets over a number of years, given a pre-determined level of performance. Once executives start to exceed these levels, pay would be adjusted in terms of future base pay increase or future equity awards.

The final perspective on determining pay is to set it in relation to the company’s profits or net revenue , as is done in many ‘professional’ service firms, such as by investment banks, private banks and consulting firms. For example, among the investment banks or commercial banks with a substantial investment banking arm, total compensation and benefits typically constitutes between 30% and 50% of net revenues.

Friday, July 18, 2008 5:32:06 PM UTC