A well-defined executive compensation strategy is one of the most important tools your organization can use to attract top talent and drive growth.
Creating a total compensation strategy for executives that delivers those results means including specific features—from wages and insurance to group benefits—that help convince highly-skilled candidates that your workplace will cater to their career ambitions, while incentivizing their long-term retention and performance. It’s one part of the wider executive planning process.
Determining specifics around salary or benefit entitlements means weighing your compensation investment against the perceived value of individuals’ services and the eventual return on investment your organization expects to earn. Your ability to compete for the very best leaders and to promote the success of your business depends on it. Because despite factors such as inflation and a looming recession creating economic headwinds across sectors, top professionals expect to earn more.
That reality has even been evident throughout the pandemic. While many workers in Canada saw their incomes devastated by lockdowns and COVID-19 restrictions, Canadian executives enjoyed much healthier paycheques. A recent Globe and Mail analysis of median CEO compensation, for example, found a 23 per cent year-over-year spike in pay for business leaders in 2021.
According to a recent report from the Canadian Centre for Policy Alternatives (CCPA), overall executive pay was up 17 per cent — an average of $171,000 per top executive — in the first year of the pandemic, largely attributable to alterations in bonus pay structure.
Further, the CCPA found that 49 publicly traded companies on the S&P/TSX composite index changed their compensation rules to boost executive bonuses, even if they underperformed during the pandemic. The report also found that variable compensation, which encompasses different forms of incentives such as lucrative cash bonuses and stock options, now comprise 82 per cent of total compensation for top executives in Canada.
Yes, compensation matters
You probably don’t own or operate a publicly traded corporation, of course, but the pool of executive-level talent in Canada is finite, so you’re essentially competing for many of the same professionals. And while considerations such as company culture, leadership aptitude and career development rank high in surveys of employees’ workplace must-haves, money talks—and total compensation nearly always tops their workplace priority list. Think of a competitive compensation framework as the lynchpin that delivers peace of mind when executives make potentially life-changing career decisions.
In that sense, effective executive compensation strategies are really about delivering financial wellness for both an organization and its leaders—allowing both parties to focus on longer-term strategic decision-making as they work to build the business—while also being a useful tool to help leaders achieve success across all aspects of their lives.
What are the key components of executive compensation?
Put simply, executive compensation refers to salary, benefit and incentive packages specifically designed for business leaders, senior management and executive-level employees. Properly designed executive compensation packages almost always include health and well-being coverage and various incentives that vary by company. Some of the most common features include (but aren’t limited to):
- Base salary
- Health and wellness group benefits (e.g., health spending accounts, global medical coverage, extended health and well-being benefits, concierge medical services)
- Robust retirement plans
- Insurance such as enhanced disability and life coverage
- Performance-based incentives (e.g., stock options, bonuses, etc.)
- Non-salary perks (e.g., business-class travel, expense accounts, executive parking, extended vacation allotments, etc.)
These are the building blocks of any effective executive compensation plan, but how large a role each element plays in your compensation strategy depends on your company’s priorities and those of your leadership team. Taking the time to determine what those executives value and designing your compensation strategy accordingly will go a long way to retaining their services. How do they define financial wellness? What kind of legacy are they aiming to build in their careers and how can your compensation strategy help them achieve that goal? Your HR team and group benefits service providers can be instrumental in helping to answer these and the myriad other questions that should be covered as part of this process.
Ultimately, the goal of executive compensation is to incentivize your top leaders to fully dedicate themselves to improving the performance of the company and to drive shareholder value. When they perform well, the company succeeds and they earn more. At the same time, the organization makes a commitment to their financial and overall well-being by ensuring their compensation is both generous and scalable.
Lastly, it’s important to view executive compensation as a dynamic structure. Industries, salary expectations and economic conditions are constantly changing. Even developments such as the heightened awareness around diversity initiatives and gender pay equity could impact the package you offer to leaders. Review your total compensation strategy annually (at least) and be prepared to update it as necessary. Most importantly, make sure that process doesn’t happen in a vacuum. Involve your executive team and ask questions, either informally or through a survey, to determine the level and kind of compensation they expect to receive. Taking the time to listen and learn can be an executive retention difference-maker.
The Bridgewell Team
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