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Last updated on 2024年7月2日

How can small businesses design effective executive pay packages?

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Executive pay is a crucial factor in attracting and retaining top talent for small businesses. However, designing an effective pay package that aligns with the business goals, the market conditions, and the executive's expectations can be challenging. In this article, you will learn some tips and best practices on how to create a competitive and fair compensation plan for your key leaders.

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Pravin Andhale

Head of Human Resources @ Glowingbud
Stephen D. Mann

Area Sr. Vice President at Gallagher Benefit Services
Carla Canuel

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1 Assess your needs and resources

Before you start designing your executive pay package, you need to have a clear idea of what you want to achieve with it. What are the roles and responsibilities of your executives? What are the skills and competencies that you value and reward? How do you measure their performance and impact? How do you align their incentives with your strategic objectives and values? You also need to consider your financial situation and budget constraints. How much can you afford to pay your executives? How do you balance the fixed and variable components of their pay? How do you ensure that your pay structure is sustainable and scalable?

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2 Benchmark your competitors

One of the best ways to determine the appropriate level and structure of your executive pay is to compare it with your competitors. You can use various sources of data, such as industry surveys, reports, and databases, to find out what other small businesses in your sector and region are paying their executives. You can also look at the pay practices of larger companies that may be competing with you for talent. Benchmarking can help you identify the market norms and trends, as well as the gaps and opportunities in your pay strategy. You can then adjust your pay package accordingly to match or exceed the market rates, or to differentiate yourself from the crowd.

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3 Customize your pay mix

One of the key elements of an effective executive pay package is the pay mix, which refers to the proportion of base salary, bonuses, equity, and benefits in the total compensation. The pay mix can vary depending on the size, stage, and industry of your business, as well as the role, experience, and preferences of your executives. Generally, small businesses tend to offer more equity and less cash than larger companies, as a way to share the ownership and risk with their executives. However, you should also consider the tax implications, the liquidity, and the vesting conditions of your equity grants. Additionally, you should tailor your pay mix to suit the individual needs and motivations of your executives. For example, some may value more flexibility, autonomy, or recognition, while others may prefer more security, stability, or growth.

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4 Align your incentives with performance

Another essential aspect of an effective executive pay package is the alignment of incentives with performance. You want to reward your executives for achieving the goals that matter most for your business, such as revenue growth, profitability, customer satisfaction, innovation, or social impact. You also want to encourage them to take calculated risks, pursue long-term opportunities, and act in the best interest of your stakeholders. To do so, you need to set clear and measurable performance indicators and targets for your executives, and link them to their bonuses and equity awards. You also need to communicate your expectations and feedback regularly, and review and adjust your incentives periodically.

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Stephen D. Mann

Area Sr. Vice President at Gallagher Benefit Services
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In our work with privately owned businesses, we typically see EBITDA as the core economic metric. We like to use cash-based awards tied to EBITDA achievement for LTIP’s. We use the award to a non-qualified plan with a vesting schedule to achieve reward/retention goals for key leaders that achieve owner’s goals for growth of the business.

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5 Communicate your pay philosophy

Finally, an effective executive pay package is one that is transparent and consistent with your pay philosophy. Your pay philosophy is the set of principles and guidelines that explain how and why you pay your executives the way you do. It reflects your vision, mission, and values, as well as your competitive position and market strategy. Communicating your pay philosophy to your executives can help you build trust and loyalty, as well as demonstrate your commitment and fairness. It can also help you attract and retain the right talent, as well as avoid potential disputes and conflicts.

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Pravin Andhale

Head of Human Resources @ Glowingbud
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In our experience this is most important part of satisfactorily managing executive level pay package. Generally we convey compensation factors and incentive structure via offer letters. It generally fails to convey the logic behind that structure. Hence it becomes difficult for executives to make sense of it. HR should explain in no less than clear terms philosophy behind it without any hesitation and with utmost sincerity. It helps bring executives onboard and align their efforts to organisations needs. This syncing of efforts can bring in best possible results.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Carla Canuel

?? ???? ?????????????? ?? ?????? | ?????? ? | Are you looking for a job in UAE? ???????????? ???? ?????? Open to hire from anywhere in the ??
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Small companies usually consider Non-Financial Benefits such as flexible work arrangements, professional development opportunities, and work-life balance initiatives.

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How can small businesses design effective executive pay packages?

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6

1 Assess your needs and resources

2 Benchmark your competitors

3 Customize your pay mix

4 Align your incentives with performance

5 Communicate your pay philosophy

6 Here’s what else to consider

Human Resources

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How can small businesses design effective executive pay packages?

1

2

3

4

5

6

1 Assess your needs and resources

2 Benchmark your competitors

3 Customize your pay mix

4 Align your incentives with performance

5 Communicate your pay philosophy

6 Here’s what else to consider

Human Resources

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