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