Compensation for Business Leaders

MANAGEMENT COMPENSATION

Management compensation plans are commonly aligned with short-term and long-term business objectives. Some of the plans provide favorable tax treatment for either the employee or the entity they manage. Laws exist (such as the Employment Retirement Income Security Act (ERISA) in the United States) that identify "key," "highly compensated," or "executive" positions that limit the amount of tax benefit that can be derived from other kinds of plans. Management may also be delineated based on the U.S. EEO-1 (Equal Employment Opportunity – Job Classification) reporting with two categories 1) Executive/Senior Level Officials 2) First/Mid-Level Managers. The leadership talent may be hierarchically segmented as "strategic management" at the top and "operational or tactical management" at the middle.

Segmentation of Business Leadership Roles

Terminology varies, but typically compensation analysis is performed for:

• top management (executives and directors)
• middle management (managers)
• first–line management (supervisors and managers)

Revenue and profit will typically determine how much an organization can afford to pay its management team.

Top Management

These are the leaders at the top of the organizational hierarchy. Also known as the executives, they are responsible for the strategic direction of the organization and the development of short- and long-term goals and objectives to ensure the success and long-term sustainability of the organization. Shareholders, through the Board of Directors, often view these executives as the trustees of their resources and they will generally be considered “insiders” with respect to policy making roles in the organization as well as having access to material business information.

Within this group are representative position titles beginning with:

• Top
• Chief
• President
• Executive Vice President
• Senior Vice President
• Vice President (except in financial institutions)
• Nonprofit Director (when synonymous with CEO)
• Managing Director (international when synonymous with CEO)

Ordinarily, top management positions are responsible for:

• The total operation of the organization (the Chief Executive Officer, Chief Operating Officer, or President)
• A major function or a significant segment of the organization such as a group or division (Executive Vice President, Senior Vice President, Vice President, Division President, Chief Revenue Officer)
• OR
• The total operation of a nonprofit organization (Director performing a role synonymous with a Chief Executive Officer)
• A major organizational function such as finance (in the United States, the associated title may be, Director).
• The operations of a significant business in a country or region. In international locations, a Managing Director job title is commonly equivalent to that of chief executive officer.
• OR
• Significant portions of the organization's budget, have a significant amount of discretion to hire/fire employees, and have a significant amount of control and input surrounding organization policy.

Top management often have an external role in:

• developing relationships with key stakeholders
• gathering and analyzing business intelligence and other critical information
• deciding where the organization is going or how to get there

Compensation for top management should closely align with the goals, mission, and success of the enterprise as well as its long-term sustainability.

Middle Management

This is the layer of management whose primary job responsibility is to oversee the tactical management of specific departments or business units, making sure that top management's strategic goals and objectives can be met. Middle managers have an in-depth knowledge of their field (or function) and spend their time ensuring operational efficiency of their function. They work with other groups within the enterprise to ensure operational success, and they have acquired effective interpersonal and problem-solving skills. Middle managers often direct other managers, supervisors or first-line managers, and individual contributors. They act as an information channel to top management and supervisors. The most typical job titles are Manager or Director. Occasionally, large companies will use Senior Manager and Senior Director as well.

A great number of contacts for this group are lateral and cross-functional, so they get work done through means other than the use of authority. Often, they must establish cross-functional relationships in a matrix-type organizational structure which can create considerable ambiguity and middle managers report feeling responsible but not having the necessary control.

Note: As organizations were right sized and eliminated management levels to reduce bureaucracy and costs, this group has dropped in size dramatically over the past 40 years as reported by salary surveys and demographic studies. Technology and the ease of communication between top and lower management have also contributed to the shrinking number of middle managers.

Front-line Management

The first line of the management hierarchy is the supervisors. They are first-line managers, supervising or managing the work of individual contributor employees, both exempt and non-exempt, depending on the industry. A supervisor is intimately concerned with a small group of workers and the output of that unit.

The pressures of the first-line manager are immediate and influence today's results. This contrasts with the pressures of a top manager, who is concerned with problems extending years into the future.

Because first-line managers work closely with the employees they oversee, their compensation tends to be set formally through a salary structure based on market practices or informally as a percentage over their workers. A 10-20% differential between workers' pay and supervisors' pay is typical. Without a differential being set, pay compression can become an issue as new hires and top performers are paid about the same or even more than their supervisors.