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Compensation Drives Results – Results Drive Value

 By Joe Liggett

In the last 100 years, the workforce in the U.S. has changed dramatically. Today, the median tenure of workers ages 55 – 64 is 9.9 years. Comparatively, workers ages 25 – 34 have a median tenure of 2.8 years, more than 3x less than that of their older counterparts.

Why is this? Although there are numerous factors at play, some of which we will explore below, compensation is a primary driver. With such a competitive hiring market spurred on by The Great Resignation of the post COVID-19 era, why is it that the vast majority of privately held businesses have made no investment to determine whether they are compensating their team members to market levels? More importantly, why is it critical that your business do so and where do you begin?

 The Primary Components of Compensation

There are four primary components that are frequently found in compensation packages. These include base salary, annual incentive, long-term incentive and employer provided benefits. Each component has a unique impact on an individual’s financial security but some are less utilized than others.

Of the four categories, the most common elements of compensation within privately held businesses are base salary and employer provided benefits. The remaining two components of compensation are incentive compensation, in the form of short-term and long-term incentive. Short-term incentive is primarily measured over a 1-year performance period and is much more common within private company compensation packages. Long-term incentive is typically measured over a performance period longer than 1-year, often times paid through equity or equity-like vehicles and is much less common within private companies than public companies.

As a business owner looking to obtain top talent, each compensation component should be evaluated to determine what will provide the most attractive package to existing and prospective employees. Primary benefits of each are:

  • Base Salary: Provides a stable and pre-determined amount of annual income to live on.
  • Short-Term Incentive: Provides upside opportunity for employees who meet or exceed short-term company goals specific to the position.
  • Long-Term Incentive: Provides long-term upside opportunity for employees, and acts as a vehicle to align employees with shareholder objectives by growing the value of the company. Often times bringing an ownership mindset to the employee base and providing for financial security later in life. Due to the extended period in which these incentive plans are measured and paid out, long-term incentive plans are often referred to as “golden handcuffs”, as they result in a future benefit to the employee and therefore a reason for them to stick around.
  • Employer Provided Benefits: Any forms of perks or compensation that are provided to employees in addition to their base salaries, wages, and incentive compensation. A complete employee benefits package may include a health insurance plan, life insurance, paid time off (PTO), retirement benefits, and more.

How to determine competitive compensation

All businesses should take measures to ensure that they are compensating their employees ‘at market’. Paying at market is a term used to refer to a level of pay that matches (or exceeds) the market average for a specific position.

Determining market pay can be costly and time consuming, and often times the data collected is unreliable or varies based on the source. However, the investment to obtain this data is well worth the benefit received. Due to this, best-in-class businesses frequently retain the services of a professional compensation consultant. Compensation consultants are commonplace amongst public companies, due in part to legislation requiring the oversight of public company executive compensation following the 2008 financial crisis.

The Deliverables and Benefits of Compensation Consultants

A compensation consultant begins by compiling a market data study from reliable sources, such as surveys and internal reporting. This data, referred to as benchmarking, brings clarity to how the existing compensation packages rank amongst competitors, or peers, within the same industry, ownership type, region, and revenue size. It accounts for an employee’s role and responsibilities (not just title), tenure, education, skill level, and more. The end product maps the percentile rank within each component of compensation, by position, for all employees included in the market benchmarking report.

Following the production of a formal benchmarking report, compensation consultants are able to make recommendations for adjustments necessary to retain and attract top talent through market competitive compensation.

Lastly, custom tailored incentive packages, both short and long-term, can be designed based on company targets and shareholder value creation. If current incentive packages are already in place, compensation consultants will include these packages in the benchmarking report, and ensure that any changes made are focused on providing the intended benefit on a market competitive basis. Consultants are able to design plans that are self-funded in order to avoid a substantial impact to the company’s financials. Incentive plans are often times what can differentiate a company’s pay packages from its competitors and provide a leg up in the hiring market while retaining top talent currently in place.

Despite the overwhelming evidence that compensation drives behavior, data shows that privately held company’s frequently avoid the subject of compensation, as their intent is to source labor at the lowest possible cost. What they fail to realize is that the benefits resulting from market competitive pay practices vastly outweigh any added expense.

If the ultimate vision for your business is to become a best-in-class competitor, you must first become a best-in-class employer with a highly capable team. Just as in professional sports, you do not win championships if you are unable to obtain the services of top talent.

WealthPoint will be hosting an upcoming webinar regarding Executive Compensation on February 23, 2023. Check out our events page for more information.


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