How Is Executive Compensation Different From Other Employees?

Most Employers Approach Executive Compensation Differently

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Updated on July 1, 2019

Photo: Klaus Mellenthin/Photononstop/Getty Images

Compensation for executive managers is different from compensation for other employees in most organizations. Executive compensation covers employees that include company presidents, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, occasionally directors, and other upper-level managers. These high-level employees are paid executive compensation.

Why Is Executive Compensation Different?

Executive compensation is different from compensation for lower-level employees. The salary and other benefits are negotiated and are documented in a customized employment contract. This is because the senior leaders of an organization come from positions in other organizations where they made top dollar as increasingly senior leaders. They expect to make comparable compensation before considering a move to a different organization.

The contract spells out compensation, benefits, perquisites (perks), performance bonuses, separation and severance agreements, and other special terms of employment.

Executive Compensation Includes These Components of Compensation

Executive compensation often includes:

base salary,
bonuses,
incentives such as stock options,
income protection guarantees, or a lump sum payment, in the event of a sale, public stock offering, or another company liquidity event that may or may not be under the executive's control,
a guaranteed severance package in the instance of employment termination for reasons other than cause,
a signing bonus for coming onboard,
executive-only benefits (also managerial-extended) in some companies) such as additional paid vacation, additional personal time, a flexible schedule, the ability to work from home, stock options, performance bonuses, profit sharing, provision of a company owned car, a company owned cell phone, company credit card, and
perquisites (perks).

The combination of salary, incentives, and bonuses is often referred to as Total Cash Compensation (TCC) for executives.

Executive Compensation Negotiations

Executive compensation is negotiated between the potential executive and the employer. Non-executive compensation is most often similar among employees who do the same job within a standard salary range. The comprehensive set of benefits and perks is also the same or similar for non-executive employees.

Executive compensation, however, is negotiated. and agreed upon in an employment contract. It may include substantial differences in perks, benefits, and salary from the organizational norm for the rest of the organization's employees.

Executive salary can range from a few hundred thousand dollars into the high millions. The compensation package is negotiated between the potential executive and the employer. The amount will depend on factors such as the size of the business, the complexity of the business, and how scarce the executive's skills and experience are in the marketplace.

How Non-Executive Compensation Differs

In non-executive compensation, employers will most often offer a salary that is within a range of starting salaries. The employer is unwilling and/or unable to extend an offer outside of that range because of budget and profitability factors.

Employers worry about salaries staying market competitive, but they are also concerned that they have employees working in similar jobs, at similar levels of the organization. make similar amounts of money. Or, they know that the difference is justifiable based on skills, experience, and contribution.

(Employees do talk about compensation, and it's legally okay for them to do so. Don't fool yourself into thinking that they won't.)

Note

Steep differences in compensation for managers, individual contributors, and team members will provoke hard feelings, affect workplace morale and employee motivation, and frankly, cause a lot of hassle for the employer. No one wants to spend their time fielding questions such as, "Why does John make more money than I do?"

As you can imagine, in business, the upside on employee salaries is what the organization can afford. One might argue that executive compensation is so out of line that companies cannot afford to compensate their mid-level employees sufficiently.

But, when an employer finds an executive level employee who can run all or part of the business and make it profitable, the employer is willing to pay.

Lower level, or starting out employees who are early in their careers, may find that compensation is not negotiable at all. The employer has a certain number of dollars that he wants to pay for the early career employee, and that's all he's willing to offer.

Note

Since competition for these jobs is fierce, the employer can stand his ground. Beginning employees with needed skills and experience have been known to negotiate salaries that exceeded their initial offer for $5,000 or more, but rarely.

The Executive Offer Letter

The executive offer letter, in contrast with a lower level employee offer letter, is more detailed and contains a variety of options usually not available to other employees. In contrast with lower level employees, the executive compensation package will include a severance package spelled out. if the employment relationship fails to work out.

This is so that the executive has a financial cushion while the executive seeks their next opportunity if the employment relationship doesn't work out. Executives generally employ an attorney to review their job offer and even, negotiate the details.

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