Market Relevant Executive Benchmarking
If they are to be genuinely useful in deciding what to do with your senior team’s pay, executive benchmarking reports involve considerable analysis and not a little thought. One aspect that needs careful consideration is the choice of comparator markets.
Recent Executive Benchmarking
In the last three months or so we seem to have had a higher than normal proportion of executive benchmarking reports in which the roles straddle more than one pay market. This almost looks like a trend but is, I suspect, coincidental. However, it does serve to emphasise that the choice of market can be significant.
More than the Usual Comparators
Benchmarking pay for directors and senior executives is usually related to the organisation’s size, for example in relation to its turnover. This is undoubtedly a significant factor, but it is not the only one. It is also important to understand other dimensions such as the organisation’s ownership, product complexity and diversity, geographical spread, structure and governing bodies.
You also need to make sure the basics are covered. That includes ensuring the job classifications are suitable, the levelling is robust and the analysis makes sense of the variations in data that you will inevitably find.
Then you need to make sure that the comparator group used is composed of relevant organisations. In most cases this is relatively straightforward. But there is a further factor to consider - the impact of alternative pay practices in different sectors, and crucially, how they impact various roles differently.
Functional-specific Executive Benchmarking
A simple example that is frequently encountered, and of particular interest to those of us grounded in Human Resources, is when you look at the data for HR Directors. Executive benchmark data for HR tends to be fairly independent of the sector it appears in. There are some exceptions but generally the HR skill-set is a reasonably transferable one.
My own background in HR started in heavy engineering and moved into retail travel. The people issues and pace of change might have been different but the HR skills I needed to address them had a similar basis.
In practical terms, experience in a specific industry might have been useful but it was not required. Furthermore, you could argue that experience in a different kind of business was a real benefit as it gave you a fresh perspective.
This example is frequently, but not always, echoed in other functional areas such as IT and Finance.
Sector-specific Executive Benchmarking
We do quite a lot of pay benchmarking with sectors where the pay market works somewhat differently from norm seen in the bulk of the private sector – for example, Social Housing and Professional Institutes & Associations. In each of these you may well find that the market for HR Executives looks pretty similar to other industries. But there are also some roles, typically some of the big operational and commercial functions, where you are playing on a different pitch. Indeed some of the Director level roles are so removed from the general market that they would inevitably be sourced within the sector.
In itself this is not that unusual. There are inevitably sector-specific roles in all industries. For example, we work extensively in the Construction and Airline sectors. Both have to look within their respective industry to fill some senior roles, frequently tending to promote from within.
What is unusual is that in some sectors you are not only competing on a different playing field but you are also doing so by a different set of rules. You may find that the balance of fixed to variable pay is totally different. Long term incentives, common in most sectors, are not prevalent. Additional factors take on a greater importance, such as a sense of social purpose, opportunities for personal growth and the role holder’s standing in the profession. Suddenly the drivers have changed and consequently so have the benchmarks.
And the need for sector specific comparisons does not only apply to pay and incentives. Executive benefits such and cars and annual leave entitlements can be significantly different between sectors.
The Right Sector for the Role
Not surprisingly, the crucial factor to consider is where you recruit your executives from and where you lose them to. This can vary both by sector and by individual role.
If we are preparing a remuneration committee report for a Professional Association we might look at the general commercial market for those generic roles that are generally transferable between industries. Meanwhile, we might go to specialised sources - in this example these include our own salary survey – for those roles that are sector specific.
In reality we look to develop and validate our conclusions however it is practical to do so. Multiple sources are clearly preferable. Having our own levelling approach and understanding how it reads across to other benchmark data sources is clearly an advantage in this respect.
Getting it Right
Ultimately it is not a case of “one size fits all”. Good executive benchmarking relies on having a sound understanding of the organisation, the sector and the roles, as well as the data itself. This has to be coupled with a robust methodology.
We work with our customers to make sure we get these things right. Then we use our experience and judgement to arrive at meaningful benchmark data that can help the decision making on executive pay.