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Soaring Salaries: It's Payback Time

October 2000 Soaring Salaries


Soaring Salaries: It's Payback Time
 

Seven-Day Workweeks. Eighteen-hour days. Labor shortages. Brutal competition. There's got to be a silver lining to the entrepreneurial lifestyle, and, apparently, high-level small-business execs are finding it in their pockets. Fueled by the tight labor market, the growing demand for tech-savvy executives and by competition from Corporate America, the salaries for key executives at the nation's smallest companies are reaching record levels, say compensation experts and small companies. Entrepreneurs, in some cases, are compelled to fork over double-digit increases--as much as 40% to 60% for new hires--and beef up the packages of execs already on board.

The problem is widespread. The National Federation of Independent Business says that in August, 29% of small businesses surveyed had to hike salaries--slightly less than the record 34% tally in May. Another recent study, commissioned by Sage Software, of Irvine, Calif., reports that 61% of the 200 small businesses surveyed have recently increased salaries.

''Professional managers are being paid a lot more competitively than ever before, because these companies want managers with proven track records,'' says Mark Meltzer, head of the compensation practice at the Segal Company, a benefits, actuarial, and compensation consultancy in New York. Pushing pay higher, he adds, is the fact that many new hires come from large companies, where they leave behind stock options, bonuses, and other incentives.

Bartholomew Broadbent, for example, recently went shopping for a new chief operating officer for Broadbent Selections, his eight-employee San Francisco-based wine import and distribution company. To attract a new candidate, he had to offer an annual base pay of $100,000--67% more than he was paying his former COO, who left to form her own company. On top of that, he threw in a $60,000 signing bonus. He didn't have much choice. ''The rising wage bill is one of the major problems we face,'' laments Broadbent, whose company's revenues have grown by 50% in each of the past two years. ''Our profits are three times lower from last year, and I can't think of anything other than salaries that could have caused it,'' he says.

It's not just the CEOs and COOs who are raking it in. While chief information officers are commanding some of the highest compensation packages, non-execs are also receiving sizable wage hikes. In addition, they're getting generous signing bonuses--and often hefty increases in noncash benefits, such as longer vacation time, flexible hours, and child-care assistance. Broadbent is also searching for an executive to join his accounting department. He's budgeting $50,000 a year for the position, up from the $30,000 he paid the last person.

In some industries, nonexecutive positions, such as Internet designers, are commanding stratospheric salaries rivaling some executive salaries, says Meltzer. ''There is a perception in high-tech companies that the creative people, not the techies, are the ones in the greatest demand,'' he adds. ''And they need to be attracted with the richest pay packages.''

TAKING IT FROM THE TOP
Today, the CEO of a $3 million company earns an average base salary of $159,543, plus about $30,000 in cash incentives, while a CEO leading a $10 million company has an average total compensation of $268,092, according to the Economics Research Institute (ERI) in Redmond, Wash. For chief financial officers, company size isn't quite as significant. The CFO of a $3 million company makes an average of $126,918, vs. $141,272 for a CFO at a $10 million company.

Traditionally, small companies have increased salaries in response to rising corporate pay. But it's often a losing battle when you try to outbid your larger competitors on compensation alone. Lucky for you, say compensation experts, many employees are choosing to work at smaller outfits over large corporations because of the flexibility and opportunity for decision-making, not to mention lifestyle perks such as casual office dress, flexible hours, and telecommuting options. Or workers are attracted to small businesses by generous incentive plans tied to company performance.

BY THE NUMBERS
In any case, you'll still need to figure out just how much to pay your employees--without overpaying in this seller's market. In general, compensation is influenced more by your industry and company size than where you're located--with the exception of a few very high-cost cities, such as New York and San Francisco, notes ERI director Briana Bennit. A chief human resources officer in Atlanta, for example, makes an average salary of $90,041, according to ERI data, while the same job in Boston fetches $98,528 and $104,132 in San Jose.

In general, ERI's data shows, the smaller the company, the less compensation is tied to risk. That means the base salary, rather than stock options and other incentives, will comprise a bigger chunk of the total package. As you would expect, the CEO is likely to have more of his or her salary tied up in incentive programs than, say, the chief human resources officer.

In most cases, the biggest winners in the salary sweepstakes are the outside CEO, who's hired by the founder to run the company, and the much sought-after chief technology officer. ''It's not uncommon for CTOs to get more in cash than founder-CEOs in the early stage of a company,'' says Dee DiPietro, CEO and principal analyst of Advanced-HR, a human-resource-consulting company based in Saratoga, Calif.

For instance, when Randy Cohen, CEO of TicketCity.com, formed a company to develop new real-time software for ticket brokers, he was shocked to find out what he'd need to pay a candidate for the CTO slot. ''He was asking for $350,000, plus an equivalent sign-on bonus and equity stake,'' marvels Cohen. Instead, Cohen opted to outsource the job to a technology firm for $750,000 a year. From a cost perspective, it's essentially a wash, ''but this way the project is not entirely dependent on one person,'' he says.

Cohen also gave Zach Anderson, his vice-president of marketing, a 15% raise this year on the heels of a 40% hike last year. ''Raises are one of the few most important factors in determining if you stay with a company,'' says Anderson. In addition an ''aggressive'' benefits package and perks like free tickets to events and a company retreat for employees and their families ''show us that the company cares,'' he says.

Meanwhile, Cohen gave his CFO of six years a 15% raise and also ponied up for 15% bonuses to each of his 32 employees. ''You have to be able to share the wealth to just stay competitive,'' says Cohen. ''But if you have a bad year, all of a sudden you can't say you're going to take back the wealth.''

Sometimes even that's not enough. Cohen recently lost a prized employee to a major competitor, even though he offered a 20% raise, fully paid family vacations, and other benefits. ''I was heartbroken because he was an excellent employee and had tremendous upside potential,'' he says.

Perhaps an even knottier decision than what to pay your staff is what to pay yourself. Chances are, you'll be sacrificing your own rewards in the early days, so you can offer better salaries to your key employees. ''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, the greater the base pay you offer, the smaller the equity stake is likely to be, says Meltzer at the Segal Company. CEO base salaries and bonuses tend to reflect the value of the company and the potential value of its stock.

BENNIES COUNT, TOO
So now you've trimmed back office expenses, decided to put off buying yourself a new car, and squeezed blood out of the proverbial stone to afford these salaries. Is that enough? Probably not. Linda Jacobsen, CEO and president of 19-employee St. Louis-based Global Vision Strategies, which conducts cross-cultural training for company executives, says she uses noncash benefits, such as flexible work hours, to attract and keep people. Recently, she agreed to give a valuable new hire, eight weeks of paid vacation, in return for a $5,000 pay cut from her previous job. But that doesn't mean Jacobsen is exempt from salary pressures. Just recently, she had to pay 25% over budget to hire someone for a project, resulting in a loss on that contract. ''The needs of the client had to be met,'' she says. ''And we can't raise prices suddenly, so we just had to take the loss.''

What about the basic benefits? Employees at all levels are demanding more generous packages, and small employers are responding. According to Dun & Bradstreet's 2000 Small Business Survey, 54% of the companies with 100 employees or less that were surveyed this year said they offered health insurance in 1999, up from 40% in 1998. Another 27% offered retirement benefits, vs. 19% in 1998. Most of the growth in retirement plans came from companies with 25 to 100 employees, says D&B.

Some small businesses are enhancing the basics, says Howard Edelstein, of the Todd Organization in Cleveland, focusing on three areas: preretirement death benefits, where a spouse, upon the death of an employee, receives the retirement benefits he would have been entitled to; special supplemental disability insurance for highly compensated employees; and employer-sponsored long-term care insurance.

Which benefits you choose to offer will depend, in part, upon the demographics of your workforce, notes Taylor Macdonald, vice-president of partners development at Sage Software. ''So if the workforce is younger, there may be education benefits, and working moms may have flexible schedules,'' he says. By the same token, your older employees will likely care most about retirement and health-care benefits.

INCENTIVES FOR ALL
While incentives are routinely part of executive packages, the trend increasingly is to offer them to lower-level employees, as well. ''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 points out that since most small private companies have to compete for employees with public corporations many small businesses offer the right to participate in ''phantom'' stock programs. These are designed to give employees many of the benefits of stock ownership as a form of deferred compensation.

Of course, you still have to keep your base salaries competitive and be conscious of the fact that many employees will be adverse to taking too much risk, says Macdonald.

But if you're lucky, a good incentive program--one that makes employees feel like they have a real stake in the company's performance--can sometimes substitute for hefty wage hikes. ''It's pretty hard to get a raise out of us,'' admits Susan Lyon, managing director of Lyon & Associates Creative Services. The 12-employee design firm, based in Encinitas, Calif., will boost employees' salaries only if they can demonstrate they've increased their value to the company by taking on new responsibilities or learning new skills.

Nevertheless, Lyon wants to keep her employees highly motivated. So she offers them a full-scale profit-sharing program, where 20% of the company's profits get divided equally among everyone who works full-time and has been employed by the company for a year or more. ''Our philosophy is that if you want more money, just help the company make more, and you're guaranteed a chunk of it,'' she says. In addition, Lyon's employees get annual bonuses of 5% to 10% of their base pay.

Of course, there are limits to a small company's ability to cope with exploding compensation packages. One solution, however unpopular, is to make do with fewer employees.

Apart from that, you might just be the one skipping the raise this year.

Read More New Articles


Business Week
October 9, 2000 by Naween A. Mangi

Freedom, perks, and parties aren't enough anymore. What top people want now from small employers is a raise--a big one
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