All in Base Pay / Salary

This year’s tax reform has had some negative consequences for executive pay. As a reminder, here’s a link to my January article on 162(m). As it turns out, it has also given many companies additional cash which, of course, is absolutely a positive. Many companies have used some of that cash to execute stock buy-backs. This, in turn, has resulted in some executives making additional compensation. How does all of this work and is there a long-term impact?

The world of compensation is filled with odd inconsistencies. Are you motivating someone to retain them, or are you retaining people, so you can motivate them? Are you looking to hire “world-class talent”, or do you want to pay more like your peers? Perhaps the most frustrating is the dilemma of compensation data being absolutely accurate and almost completely wrong.

Triennial merit pay increases are the latest trend in compensation. This exciting new approach to base pay is something to consider before your next round of raises. Once every three years.

I have listed five reasons to consider triennial increases and am sure you can add to this list. I am also sure that naysayers will point out potential problems, but we optimists can chat about those some other time.

I was speaking to the Head of HR at a small, talent-intensive company. We were discussing the cost of long-term incentives as related to their compensation philosophy of paying between the 50th and 75th percentile. Adding equity effectively and economically is always a challenge.

At the companies who eschew variable pay altogether, the problem can be worse. Many of these companies pay base above the median. Over the year, the compounding growth in base pay outpaces the market, their needs, and the companies’ budget. High base pay can be a great approach, but it must be managed and explicitly communicated. Errors in this philosophy can be hard to correct.

We have been living in an age of 3% annual increases for several years.  Sometimes it’s a bit more; sometimes it’s a bit less. On average, it’s not too inspiring. We do our best to give a bit more to our best performers, but those in the middle must fend for themselves. It’s not hard for them to find a time machine.

Your new CEO wants the old LTI plan replaced before the start of the new year. The head of Business Development needs a new sales incentive plan by the end of the month. People know exactly what needs to be fixed but may not have a complete understanding of what it takes to fix them. We can build temporary solutions quickly, but doing things correctly often requires starting with the foundation.