Executive compensation is one of those terms that can conjure up different images depending on which side of the fence you happen to be on. For some, it simply means the strategies associated with the payment of executives for their contribution to the organization. For others, it represents the fear that executive-level employees may be detrimental to the organization by putting their need to maximize their own compensation over what’s best for the company. Either way, striking the right balance with your executive compensation plan can be tricky. How do you differentiate executive compensation from the other types of compensation on your payroll without causing undue issues?

In a BLR webinar titled "Executive Compensation: How to Design an Attractive and Cost-Effective Plan for Your Organization," David Wudyka outlined some guidance on what differentiates executive compensation from other types of compensation, and used this as a basis for discussion on crafting executive compensation plans.

What Makes Executive Compensation Different from Other Types of Compensation?

Executive compensation is quite distinct from other employee compensation. It is sometimes called the "third payroll" (the first two are the "exempt" and "nonexempt" for regular employees), due to it being so separate both in terms of strategy involved and the level of pay.

On that note, it may also be referred to as another level of strategy, since executive compensation typically requires a different way of thinking when trying to attract, motivate, and retain executive-level employees. As such, it also requires a new terminology to handle the nuances that do not arise for other employees. Things like stock options and perquisites are common.

Another issue that separates executive compensation is taxation. Wudyka noted that "once you delve into executive compensation planning, there are tax implications for many of these programs, so tax knowledge becomes important." HR professionals must understand the nuances and legalities (or hire someone that does), as they can be a major component of a total compensation program at the executive level.

Next, the government has discrimination testing requirements to ensure employers aren’t being unfair in terms of treating executives in a way that is considered to be unfair or illegal.

Finally, motivating executives is actually a challenge due to their level of compensation. Employers need to determine what factors can assist in executive motivation, such as bonus payments for performance (what amount is enough?), or part ownership in the company.

Linking Executive Compensation and Executive Motivation

Wudyka pointed out "we have to use some strategies to motivate executives that may be a little different than those that we use for the rest of our company’s population."

Giving company equity and ownership is one such example of a means of executive motivation. "When people in the company … own stock, it strengthens what is known as ownership thinking. With every share of stock that an employee owns, it makes that employee a partial owner of the company, no matter how few the shares may be … the more that you own, the more you’re likely to invest … of yourself in your company’s success."

These are just some brief examples of the types of considerations you must keep in mind when designing or re-designing an effective executive compensation program.

For more information on executive compensation, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

David Wudyka, managing principal and founder of Westminster Associates, manages and oversees all company operations, including the design, development, and implementation of all client HR programs. His specialties include human resource analytics, audits of HR operations, employee retention strategies, and group incentive plans.