Overall Approach to Executive Compensation Surveys
As an Adjunct Professor, Tim McConnell of our firm taught graduate courses in Compensation and Compensation Strategy in the Advanced Program in HR Management at the Rotman School of Management, University of Toronto for several years. The industry standard best practices outlined below were part of this curriculum.
While our firm may be hired by the senior management of our clients, we are often called on to present our findings and rationale to the Boards of Directors of these organizations as they exercise their fiduciary responsibility. This is particularly true in the case of Executive Compensation, where the client is the Chair of the Board.
We have been called into hearings (for example) by the Executive Committees of the Board of Directors of organizations such as the Hospitals of Ontario Pension Plan, Perley Health, and United Way Centraide Canada to justify our recommendations.
Elements of Executive Compensation
- There are five basic elements in Executive Compensation; Base salary, employee benefits, perquisites, short-term incentives, and long-term incentives.
- Our Executive Compensation reviews cover all of these, except long-term incentives which are usually not offered in the NGO/Not-for-Profit sector.
- In Executive Compensation, we normally survey for actual base salaries or Job Rate.
- Most senior executive positions do not have a salary range per se, or a job rate. In the NGO and Non-Profit sectors, the CEO / Executive Director is often at the Job Rate.
- The key to any survey is job matching. This is the most common method of ensuring comparability of data.
- Job matching looks for comparable positions with similar job content and responsibility. In order to accomplish this, we look at several factors.
- The first factor is the industry sector, your comparative labour market. Depending on who the client is, we are often looking at the NGO/Not-for-Profit sectors.
- Within this sub-sector, we look for comparable scope. In the private and public sectors this is normally assessed by size of operating budget and number of employees. To obtain a full picture, we include organizations in the client’s sector that are both larger and smaller than the client organization.
- It is important to emphasize that, statistically, sector, revenue and staff size are generally the major correlating factors driving executive base pay – with the exception of the NPO sector, see below.
- These are the tangible factors. They are used by every Compensation Consulting firm and published survey.
- Geography is a tangible factor. There is normally a regional (Ontario/Quebec) or national labour market for executives.
- The other major tangible factor driving pay is occupation, and the relative supply and demand in the labour market. Generally speaking, occupations requiring greater qualifications receive higher rates of pay.
- In salary survey job matching, occupation generally ‘self-screens’. That is, for a Director of Finance we are looking at other Directors of Finance.
- In most cases, we are looking at other CEO / Executive Director positions. However, in the medical community sub-sector, a number of potentially comparable ED’s in other organizations are physicians. Their rate of pay is determined by the market for physicians, not Executive Directors.
- If the CEO / ED of the client organization is not a physician, we normally exclude data from the physician-led comparators.
- An intangible factor is the relative importance of the client organization’s value-added role in the professional and /or client / stakeholder communities. This factor is not statistically measurable or quantifiable. The impact of this on the value of the Executive Director’s pay (over and above our standard survey methodology and findings) would need to be a judgement call by the Board of Directors.
- In terms of statistically validity, the approach in surveying is to obtain data from as many ‘comparable’ organizations as possible.
- Standard Deviation is a statistical method used to validate salary survey data. If a job match has been done properly, then the range of survey data for a given position should (normally) not be significantly different. Compensation specialists use a calculation of plus or minus two standard deviations to exclude “outliers” and improve the statistical validity of the results.
Comparability in the Non-Profit Sector
Our extensive compensation work for executives in the NPO sector finds that, for the most part, there is minimal correlation between CEO / ED rates of pay and the size of the organization. This certainly exists in the private sector.
That is, a well-known, highly qualified, highly educated (degrees and designations) and seasoned senior association or health care executive is going to demand the same pay whether they are steering a 20 person regulatory body (or COE) or directing a 3,000 person agency with VP’s managing operations.
The following graphs illustrate this.
In the NPO cases, the correlation with base pay is low, as indicated by the Correlation Coefficient (R2) of 0.4. A high correlation would be in the 0.8 range.
- Another aspect of Compensation is the organization’s Pay Policy Position. That is, where do you position your salaries relative to those paid by your comparative labour market?
- Most NGO’s / NFP’s will aim to pay at the average (or mean) of the survey data. A few will target P65.
- A related data point is the 50th percentile of the data, or P50 for short. This is usually close to the average (although statistically a separate measure.) So, the phase “being competitive” means P50 in HR terminology.
- Some organizations, however, deliberately choose to pay more than the market average, recognizing that ‘average’ means half of the data is higher. This is often because they need / want to attract and retain better than average employees.
- Relevant Labour Market.
- While we often look at multiple sources of data in surveys, some organizations decide to directly compare only to a selected few organizations – and match their pay to those comparators. This is done via a customized Salary Survey of selected respondents.
Tim McConnell, MPA, SPHR
McConnell HR Consulting Inc