Compensation for Business Leaders

Comparing Similar Organizations

There are several key factors to consider regarding the selection of comparable organizations:

• date of an analysis
• geographic location
• organization size
• industry

Date of an appraisal. With the fast movement of management compensation, care must be taken to find comparable data from the same time period.

Geographic location. An example from one of the products in ERI's Assessor series shows clear geographic pay differentials explainable only by location.

Image source: ERI's Executive Compensation Assessor

Country practices also reflect the variance of compensation for similar functions in organizations of like size, but this could be caused by tax laws, cost of living, cost of labor, legal requirements, and cultural differences, rather than geographic differences.

Organization size. Organization size has proven to be a major criterion in determining top management pay. It is often defined by annual revenue, the asset size of the enterprise, fiscal budget, or the number of employees. Surveys vary their reporting of management compensation by these dimensions. Most utilize revenue, but financial institutions have long used "assets." Nonprofits and consulting firms may use the number of paid employees or their fiscal budget.

The End Game - a Comparable Peer Analysis

The key today (under IRS rules) is to create peer analyses to justify the payment of "competitive pay." This would be a peer analysis that uses select metrics to establish comparability and that takes into account all the elements of executive pay.