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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | AUGUST 8, 2000 STAFF & BENEFITS Salaries Go Sky-High Defectors from large companies are getting small outfits to meet their lofty demands
Salaries for key executives at the nation's smallest companies are rising at an astonishingly, and even alarmingly, high rate compared with two years ago, according to compensation experts. They say the trend has been set by defectors from larger companies, who can command top dollar. Experienced managers who leave big corporations for small startups promising rapid and substantial growth are usually compensated with greater-than-average packages. This, in turn, has raised the salary level for all small-business employees. Today, the CEO of a $3 million company makes on average a base salary of $159,543 plus about $30,000 in cash incentives, while a CEO leading a $10 million company has a total compensation of $268,092. The variation by company size is less apparent for chief financial officers, who make an average of $126,918 at a $3 million company, vs. $141,272 at a $10 million company, according to data from the Economics Research Institute of Redmond, Wash. There's no hard data on how much executive compensation has risen, and the ERI says that a major change in their methodology prevents comparisons with 1998 data. But anecdotal evidence and discussions with compensation experts show that an upward trend is clear. Compensation experts say small businesses need to be able to determine exactly how much to pay employees so that they don't end up overpaying in this job-seekers' market. So, with the help of the ERI, we've updated our salary benchmarks for a typical small business. (See www.businessweek.com/smallbiz/salary/sb_naverage.htm.) GEOGRAPHICAL DIFFERENCES. Our survey has data for national averages as well as regional variations. But ERI Director Brianna Bennitt says industry and company size are the big factors in the discrepancies between the salaries for the same job at different companies. Geography only really matters in such areas as New York and San Francisco, where the cost of living is particularly high and is taken into consideration when compensating employees. At Broadbent Selections, a San Francisco-based wine importing and distribution company, a recent search for a chief operating officer resulted in the salary for that position being almost doubled. According to the company's president, Bartholomew Broadbent, the previous COO was making $60,000 and the new recruit was hired for $100,000 -- with a $60,000 bonus. Broadbent is also searching for an accounting executive, and he expects his bill for that position to increase from $30,000 to $50,000. "The rising wage bill is one of the major problems we face," says Bartholomew. "Our profits are three times lower from last year, and I can't think of anything other than salaries that could have caused it." A recent National Federation of Independent Business survey found that a record 34% of small companies are finding it hard to fill openings and 32% of businesses hiked their payrolls in June alone in a bid to attract the best talent. Within the past year, 61% of businesses increased salaries, according to another study commissioned by Sage Software, based in Irvine, Calif. RECRUITMENT AND RETENTION. Small companies have traditionally looked to larger companies to set their employee compensation. And with salaries trending upward in this strong economy, small businesses have had to work even harder at recruitment and retention. If compensation were just a matter of money, however, small businesses would lose hands down to the big players. But compensation experts say many talented, well-qualified people choose smaller companies over corporate giants because they value the flexibility and decision-making ability that come with working for a small company. ERI's data show that the smaller the company, the less likely the risk of it foundering will affect compensation. How does that play out? It means that if you're the CEO of a company that makes $10 million in revenues every year, your base salary is likely to be a lower proportion of your total compensation than if your company generates $3 million a year. The more advanced the title, though, the more risk plays a role in compensation. As Dee DiPietro, CEO and principal analyst of Advanced-HR, a human resources consulting company points out, risk is also tied to the life-stage of the company. And this, in turn, helps determine executive pay. The newer the company, the higher the risk and the more the stock component accounts for total compensation. VALUE IN TECHNOLOGY. Erisa Ojimba, a compensation consultant at Salary.com, based in Wellesley, Mass., points out that information technology jobs also tend to have returns linked to risk. "IT can have an enormous impact on the viability and success of a company," she says, even though these posts are not necessarily executive-level jobs. In fact, experts say it's the boom in the technology industry that generated the acute need for specially trained people and that this pressure in the labor market spilled over into other aspects of the economy. Judith Fischer, managing director of Executive Compensation Advisory Services, dates the trend back to the e-commerce boom three years ago. "Anyone with technical knowledge is gold," she says, "and they are being paid in large cash and equity packages." In many cases, chief technology officers at small tech companies are the most highly paid executives. "It's not uncommon for CTOs to get more in cash than founder CEOs in the early stage of a company," says Advanced-HR's DiPietro. FOUNDERS VS. NONFOUNDERS. Founder CEOs have traditionally taken lower cash compensation to be able to attract the best talent with attractive pay packages, whether in the tech department or elsewhere in the company. "It's an early-stage practice," says DiPietro. "Once they get venture funding, they tend to pay themselves more," she says. For outside, nonfounder CEOs, however, the remuneration has become increasingly competitive. Compensation consultants say CEO base salaries and bonuses tend to be proportional to the value of the company and are influenced by the potential value of the stock. "There is a lot more separation between the individual investing the money and those running it now," says Mark Meltzer, senior vice-president and head of compensation practice at Segal Co. "Professional managers are being paid a lot more competitively than ever before because these companies want managers with proven track records. And many of them are leaving large companies where a lot is left on the table," he says. CEOs whose compensation packages have less equity as a percentage of total compensation have seen greater pay increases than those with more equity, adds Meltzer. GREATER DEMANDS. In general, employees at small companies are demanding more and more nonfinancial rewards in addition to profit-sharing and sign-on bonuses. Flexible work schedules, casual dress, and telecommuting are just some of the benefits small companies now offer their employees. According to a survey conducted by the Employee Benefit Research Institute in Washington, D.C., 94% of small businesses offer health-insurance plans, more than two-thirds offer paid sick leave and life insurance, and more than half offer education and tuition assistance. "This is why people choose smaller companies," says Roger Harris, president of Padgett Business Services, a financial-reporting and tax-consulting practice. "It's for the convenience. And companies are having to find creative ways to get and keep people, so benefits tend to be lifestyle-driven, like family-oriented vacations." A trend experts find more alarming is how nonexecutive employees now command cash incentives. "Formerly bonuses, incentives, and stock options were things only owned by the top," says David Leach, national director of compensation consulting at Buck Consultants, a human-resource consulting company. "This has all been pushed lower down in the organization now," he says, adding that since most small private companies have to compete with public companies for staff, many are also offering phantom stock as a form of deferred compensation. "Three years ago, there was a very balanced look to compensation," says Executive Compensation Advisory Service's Fischer. "There used to be stock participation, a 401(k) plan, and perhaps a defined retirement plan, but now that's not too exciting," she says, adding that massive signing bonuses, unheard of a few years ago, are now common practice for middle-management positions.  By Naween Mangi  | | |
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