Executive compensation is often a focal point for comments by shareholders, employees and the media. I'm of the opinion that if an executive is improving the financial performance of a company, then they should be entitled to sharing in the rewards. However, when a company's relative performance is deteriorating, then the leadership should suffer along with the other stakeholders.
Recently, while reviewing an annual report of a leading Canadian company, I came across a revealing chart. The senior executive compensation was compared with the company's net income. I was pleased to see that this executive team was providing added value to the stakeholders. The relation of their income to profitability was decreasing.
This comparison was new to me and not one that I remember seeing before.
On reflection, this simple comparison seemed to be a very useful and revealing tool that any organization could use. How does the total compensation for your management team compare with your company's profitability over the last five years?
When reviewing salary adjustments with employees, it could be useful to show them how their salary has progressed relative to the profitability of the company. Doing this has some risks. For example, if compensation has not kept pace with profit growth, the employees will undoubtedly complain.
A comparison of this type should not be limited to a one-year period, since aberrations can occur that skew the picture. Five years is a reasonable time period for developing a comparative chart.
If a comparison is developed, it should not be limited to salary. Bonuses and benefits should be included in the total compensation figure since these are significant business costs that have a habit of growing in a stealthy manner. Too often they're not recognized by management and seldom recognized by employees.
If management doesn't want to provide the compensation/profit comparison to employees, it's still a good management tool to develop for tracking compensation costs.
Total compensation
When discussing compensation, many managers make the error of focusing attention on base salaries (sometimes we include bonuses or other incentive compensation). This has been done for such a long time that individuals either forget or disregard other things that they receive.
A useful exercise for management to undertake is a compilation of what an employee's total compensation truly equals.
We've found that when this has been done, both management and employees are amazed at what total compensation amounts to. Some items are very apparent – salary, bonuses, and vacations. However, most employees have no idea what other components of compensation are costing the company.
Let's look at some of these other aspects of compensation:
Life and health benefits:
- Cost of life insurance.
- Cost of short-term disability insurance.
- Paid sick leave.
- Government premiums for health insurance, unemployment insurance and WSIB.
- Medical and dental insurance.
Training and development:
- Cost of in-house seminars.
- Payment of tuition.
- Payment for development courses.
Ancillary Costs:
- Parking.
- Cell phone and/or blackberry costs.
- Lunch room and/or coffee expenses.
- Recreation costs.
Post employment costs:
- CPP
- Base pension or RRSP contributions
- Matching pension contributions.
The above list certainly isn't complete, but it gives an idea of costs incurred for employees. These costs will likely vary by employee based on their status and occupation. However, they're all costs that an employer incurs. Most employees take them for granted and don't ever think of the total cost that each of them represents.
It takes time and effort to develop this information on a per-employee basis, but it's useful to do from time to time to bring the realities of compensation to both the employee and management.
Fred Pamenter is managing partner of PPB&D Consulting Limited, a Toronto based Human Resource firm. T: 416-620-5980E: ppbdconsulting@aol.com
