How to structure competitive executive compensation packages

Finding great candidates to fill executive positions is inherently difficult. Though quality candidates can be found, companies tend to lose their top pick because they can’t meet a candidate’s compensation expectations.

“Companies often enter into an executive search intending to construct a competitive compensation package for the right candidate,” says Tim Conti, managing partner at ON Partners. “But when it comes time to make an offer, the hiring company balks because an overly generous offer could disrupt the internal equity of compensation packages. That logic is irrelevant to the candidate.”

He says too often hiring companies hope they’ll find a candidate who loves the opportunity so much they’ll take the job regardless of compensation. That rarely happens, which is why companies need to be more realistic about executive compensation before setting out on their candidate search.

Smart Business spoke with Conti about structuring competitive executive compensation packages.

What are executive candidates looking for in terms of compensation?
There are benefit items that can be meaningful, such as 401(k) matches, but for executives the benefits package alone won’t seal it. Executive candidates often want to share in the company’s success and reap the returns generated by their own achievements. They’re looking at total compensation, which includes the base salary, incentives and equity.

How can employers create a compensation package that works for everyone involved?
Fundamentally, employers must ask themselves if they’re truly trying to attract best-in-class talent, which is expensive. Does the company really want a change agent? It’s not likely to get one if after asking itself difficult questions it prioritizes maintaining the internal pay equity of the current peer group over spending what it takes to make an impactful hire.

Companies should ask themselves if they must stay within a predefined range, or extend themselves to compensate the talented outliers. If it’s the latter, be mindful of the candidates’ pressure points. Some candidates want a stable, dependable base salary while others want a strong equity position. Every candidate is different.

When in the interview process should compensation be discussed?
The compensation conversation, 90 percent of the time, is tackled too late in the process. When a company has engaged a great candidate it’s important to know the candidate’s compensation expectations in the first two weeks. That’s typically after an initial interview when it’s clear both parties are interested in each other.

If working with a recruiter, the compensation discussion should start very early in the process with the recruiter obtaining a very detailed compensation history from the candidate. Compensation discussions should advance in parallel with the interview process so that expectations for both parties can be understood. This transparency gives both sides the best chance to figure out how to bridge any gaps that become apparent.

What can companies that might not have the ability to pay a large salary do to create a strong compensation package?
In addition to annual target bonuses, strong compensation packages often include management-by-objective bonuses rather than goals based solely on the financial performance of a business unit or company.

Progressive companies bridge pay gaps with sign-on bonuses paid out over time, for instance breaking a $100,000 sign-on bonus into $25,000 payouts each quarter. That often helps to preserve internal salary ranges while still generating the compensation necessary to hire the candidate.

Equity grants — in the form of restricted stock units or options — are also a valuable means of attracting top candidates. Equity grants align the interest of the candidate and the company since equity value tends to move in concert with company performance.

The best talent is expensive, regardless of how the compensation package is structured. To attract top talent, the hiring company cannot rigidly adhere to its own internal compensation ranges. Doing so severely limits the caliber of candidates it is able to attract. ●

Insights Executive Search is brought to you by ON Partners