Understanding the strategic differences between executive pay and employee compensation is essential for HR leaders shaping competitive total rewards strategies. Executive compensation is typically benchmarked against peer organisations, while employee pay relies on structured salary ranges and market surveys. Aligning each with business goals and internal equity supports retention, performance, and organisational reputation.
Recently, I was working with a General Counsel who was tasked with putting together an analysis of the pay for their top five leaders in preparation for their annual Board Meeting. As pay equity regulations trend towards increased levels of transparency and as organizations respond to the COVID-19 impact on the US economy, it is no surprise that the Board wanted to take a closer look at their executive pay.
Luckily, this organization was not in a position where they needed to make layoffs to survive the pandemic, but I considered the thought of an organization that let go of a large population of their minimum wage workers and made no adjustments to executive pay. What would the implications of a media spotlight on a decision like that be for an organization? Likely terrible, and a strong crisis communication plan would need to be executed.
It may come as no surprise that executive compensation is subject to public scrutiny, legal regulations, and tax considerations, which all impact the appropriate level of pay and the pay mix. It is often the target of media coverage as the earnings of top executives generate public discussion about the reasonableness and fairness of pay practices.
When I was speaking with this General Counsel, he shared that he understood that evaluating executive pay is different than employee pay, but that he was not sure where to begin. I thought maybe there are others who are in this same position who would appreciate further explanation.
The Differences Between Executive Compensation Vs. Employee Compensation
As a Senior Compensation Consultant at Helios HR, the approach I take to determining executive-level pay is quite different than the approach to employee compensation:
- Executive compensation is typically determined through an analysis of the compensation of individuals in similar roles at comparable organizations to determine a reasonable rate of pay.
- Employee compensation is typically administered through a salary structure, establishing a range of pay for roles within the organization.
Peer Group Analysis
When evaluating executive-level pay for a client, my team and I look to identify a list of 10-20 peer organizations. Peers are similarly situated organizations in terms of their mission and role in the marketplace. These are often the organizations with which the organization competes for business, but in addition to this group, it is important to consider who the organization competes with for talent.
For publicly traded organizations in the peer group, we will review the companies’ annual proxy statements that are filed with the SEC. For non-profit organizations in the peer group, we will review the companies’ Form 990s that are filed with the IRS. In these statements, pay details for executives are available and can be used to analyze base salary, bonus, and total cash compensation.
If the data set is large enough, we will look at the 25th, 50th, and 75th percentiles of the peer group’s executive pay. In addition, we often conduct a regression analysis to determine if there is a relationship between revenue size and executive pay.
In our experience, the larger the organization, the larger the total cash compensation for executives. When a linear regression is a good fit for the dataset, we can identify where the organization’s executive pay falls on the trend line based on revenue size.
This approach to executive compensation is arguably more precise than leveraging salary surveys, which is common for employee compensation, as it analyzes pay for the individual executives in the comparator organizations.
Salary Survey Analysis
A market-based approach to employee compensation often uses salary surveys to benchmark market rates. Reliable salary surveys collect incumbent level data directly from an organization’s payroll and are available by industry and geographic location.
To begin this analysis, we review each job description and select benchmark jobs from the survey. When determining the best match, we look for approximately 70-80% of the duties, education, and years of experience in the survey job to match the organization’s job. There is rarely an exact match between a benchmark job and the organization’s job because most organizations customize certain aspects of their roles to suit their unique needs.
The benchmark data is reported in percentiles for base salary and total cash compensation. An organization’s compensation philosophy drives the direction for salary structure development, but at a high level, ranges of pay are developed based on the desired market reference point. Most commonly, organizations target the 50th percentile or median to establish the midpoint of their salary range. This range of pay is then used to manage the compensation for employees.
When developing salary structures, it is always a good idea to evaluate executive-level pay as a part of that effort, as it helps set the ceiling for pay within the organization from an internal equity perspective.
In Conclusion
When developing executive compensation packages, many agree that pay for performance is the best approach, ensuring alignment between pay practices and an organization’s long-term goals.
While the approach to executive-level pay and employee pay is different, the heavy lift comes in the first year of taking an active role in determining the market rate, given the effort in establishing a peer group and identifying benchmarks. Once that is complete, the effort is maintenance rather than building from scratch.
To stay competitive and ensure pay continues to align with the organization’s philosophy, it is important to continue monitoring the market. Helios recommends that market data be reviewed on an annual basis. This review allows the organization to adjust its compensation strategy to reflect trends occurring in the market, and then translate that to better position compensation practices.
Frequently Asked Questions
How often should compensation data be reviewed?
Regular reviews — at least annually — ensure both executive pay and employee compensation align with market movements and organisational strategy. Helios HR
Should executive compensation include stock incentives?
Yes — balanced packages often blend base pay, annual bonuses, and long-term equity awards to align executives’ interests with long-term shareholder value. figures.hr
What's the role of internal equity in compensation?
Internal equity ensures fair pay practices across an organisation, supporting retention and reducing turnover risk. figures.hr
How does pay-for-performance work for executives?
It links compensation elements (like bonuses and equity) to measurable outcomes — financial goals, strategic milestones, or other long-term objectives.
Additional Resources
-
CIPD on Executive Pay Governance: Analysis of executive pay scrutiny and governance expectations
-
SHRM Executive Compensation Toolkit: Strategic guidance for designing executive pay plans
-
Executive Compensation Benchmarking Practices (INOP): Guide for HR on benchmarking approaches