Why is it important to salary benchmark?

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Andrew Linger, Director of Executive Search at Robert Walters, discusses some of the key advantages of salary benchmarking.

Companies often come to us wondering whether their senior executives’ remuneration packages are in line with those offered by other organisations of similar size. Few employers routinely have access to this information, and gaining it can be challenging.

Why is it so important for companies to know this?

In some cases, they don’t want to risk losing their top executives to offers of better pay packages from competitors. In others, they want to be able to prove to their shareholders in black and white that their senior staff provide value for money. With variations in pay potentially being the difference between retaining or losing highly valued directors and keeping shareholders happy, salary benchmarking can be vitally important to the success of an organisation.

Where to start when benchmarking?

Listed businesses have remuneration committees in place for exactly this purpose but, without any guidance of the compensation packages offered by other organisations, it can be difficult to know where to start. Salary surveys can be useful for benchmarking at more junior levels, particularly with the significant volume of data that can be generated when comparing pay for roles that are relatively common in the marketplace. However, at the most senior level – where there are simply fewer roles to compare and we typically see a huge variation in the make-up of compensation and benefits packages – these are not as useful.

What is salary benchmarking?

Salary benchmarking can help companies to overcome these issues. Crucially, this is a much more focused and detailed process than a traditional salary survey. Benchmarking gives a complete breakdown of the compensation package allowing companies to compare salary and benefits available within specific sectors and named companies. So, overall it is a much more exact science.

How is it possible to get this information?

For listed businesses, the majority of it is available publicly within annual company reports. However, organisations will typically not have the required resources to trawl through large volumes of these reports to obtain the meaningful results and analysis this information can provide. Enlisting a third party, such as Robert Walters, to carry out this work can therefore save a lot of time and effort. Additionally, the report is impartial meaning the results produced are completely reliable and accurate.

With variations in pay potentially being the difference between retaining or losing highly valued directors and keeping shareholders happy, salary benchmarking can be vitally important to the success of an organisation. 

What information does salary benchmarking allow businesses to obtain?

Typically, it will provide a list by company size, sector and revenue which details the package earned in terms of the value of the basic salary, cash bonus, share bonus, long term incentive plan (LTIPs) and pension of the position in question (be it CEO, COO, CFO or FD).

What are the advantages of salary benchmarking?

The advantages of this are numerous. Firstly, pay varies widely depending on sector.  In research we recently completed, for example, two specific businesses from within the scientific & instruments and manufacturing industries, with similar revenues, paid their CEOs basic salaries of £288,000 and £175,000 respectively. Salary benchmarking allows organisations to get an idea of these differences, while at the same time finding out pay levels typical in their own sector.

Secondly, the value of different components of the package can differ greatly depending on the employer. Salary benchmarking considers all aspects of remuneration to ensure it gives an accurate reflection of the take-home package. As an example, LTIPs are generally offered to senior directors to ensure they stay with or grow the company in the short, medium or long-term.

Typically, they provide the opportunity to buy shares at a certain price but, as part of the deal, forbid executives from selling them for a set period of time – usually at least three years. As LTIPs routinely include share options and share prices change daily, they are the hardest part of the package to benchmark. However, our salary benchmarking approach – which includes an analysis on the frequency that the LTIPs are granted – ensures these are taken account of in the final results.

Thirdly, and most importantly, salary benchmarking allows companies to make comparisons of these figures between a large number of other businesses. As part of the analysis, for example, the research can determine the overall mean, as well as lower and upper quartiles, of the value of each component of directors’ overall compensation packages. These then give a clear indication of how their directors’ pay compares with the market.

Overall, salary benchmarking gives an impartial and accurate idea of pay information to help businesses make informed and effective remuneration decisions, while at the same time accounting for variations that need to be considered.

Robert Walters’ Executive Search provides a senior executive salary benchmarking service. For more information, please contact Andrew Linger at andrew.linger@robertwalters.com or 020 7071 7074.

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