Just rewards: it's not so much what someone is worth as what you want a pay package to accomplish that determines executive compensation

Folio: The Magazine for Magazine Management, Nov 1, 1990 by James B. Kobak

Grading executives

But there are different levels of executives--and they have to be treated differently. Let's divide them into three groups:

* Indispensables: Those who could run the whole business if necessary, and without whom you couldn't grow.

* Talents: Those who supply specific, vital skills, but who wouldn't be entrusted with running the business.

* Other executives: Those who make the business work--and work well. And there are plenty of them.

All employees, but particularly executives, can be compensated in an inexhaustible number of ways. And accountants, lawyers, agents and, yes, executives themselves, are constantly dreaming up new methods. For a list of some of the options and who might get them, see Figure 1.

In previous years, the key to many of these plans was the income tax laws, which maximized the value of dollars given to the executive and minimized the cost to the company. Unfortunately, tax laws are constantly changing, as are tax rates. Don't get too caught up thinking about taxes. Most important is to consider the real purpose of executive compensation -- what it is you are trying to accomplish. Tax games are just one consideration when compensation packages are being planned.

The amount of cash paid and the way it is bestowed can make a great deal of difference to a company and its employees. And although every company tries its hardest to keep salaries and other payments secret, it is best to assume that everyone knows everyone else's pay and benefits. Let's review various ways an executive can be rewarded with cash:

* Salary: Nice to increase it each year, but by how much?

* Arbitrary bonus: Determined annually by the boss. It might be appreciated if the recipient believes it to be enough.

* Opportunity bonus: Hand someone $500 on the spot for a good job. Great for morale throughout the company if it is thought to be deserved and fair.

* Suggestion-box awards: Can be effective, but running a suggestion-box system takes time and effort. If it isn't done well, it can backfire.

* Profit Improvement Plan (PIP): Sounds good when talked about, but must be carefully designed. (More about these later.)

* Commission or override: Usually applied to advertising sales, but can be used in some other areas.

* Fringe benefits: Every company offers some to a greater or lesser extent. Various kinds of insurance; savings, pension and profit-sharing plans; tuition payments; and child care are some typical examples. Warning: The tax code makes it essential that owners and highly paid executives not receive an overly liberal share of these. Use a good tax person when planning fringe packages.

* Signing bonus and guaranteed annual bonus: Once given only to baseball players and the like, now awarded to college professors and executives. But consider the effect on long-time executives when the new guy gets $50,000 just for joining.

* Firing bonus: A new one I just thought of. How about $500 for the executive who fires the most unnecessary employees?