First, the organization should have a dynamic strategic plan in place that addresses the major functional areas such as products/services, facilities, staffing, financials, etc. Within the staffing area, there should be some objectives that address the ability to attract, retain and grow personnel to meet the growth objectives of the strategic plan.
Secondly, as a subset to the strategic plan, there should be an adopted compensation philosophy (pay and benefits) that has been developed and approved by the Board of Directors. The compensation philosophy addresses how the organization is going to treat its personnel regarding base pay, bonuses, benefits, etc. and what the plan looks like compared to the marketplace. For example, some organizations will provide Executive Compensation at 20 to 25% below market level, but create a target-based sliding scale incentive compensation plan that allows Executive Compensation to be compensated as high as 50 to 75% of their base salary with performance targets being met.
Thirdly, an Executive Compensation plan is established that covers the key personnel of the organization and links back to the board-approved compensation philosophy. This plan will include base salary, bonuses or incentive compensation, short-term and long term benefits and deferred compensation opportunities. The plan will be performance-based and created so that it stands the test of any outside regulatory requirements before it is approved by the Board of Directors. The objective of the Executive Compensation plan is to create the right environment to motivate key executives to stay and grow the organization and be rewarded for their efforts without creating undue risk on the organization or themselves.
Fourthly, the Executive Compensation plan is formalized in an employment agreement that is signed by the Executive, the President/CEO of the organization and the Board chair of the Personnel Committee. This plan is created and/or reviewed by the organization's legal representative to ensure all aspects of the employment agreement are covered as well as making sure that the plan provides the best form of communications and expectations between Executive and the organization.
Fifthly, the organization's performance and each Executive's incentive compensation and other deferred compensation should be reviewed quarterly, or at least 2-3 times a year to keep a current view of each Executive's performance compared to the established targets and the impact to the organization's revenues and income. In addition, a year-end review is conducted and new targets are set and approved by the Board for the next year.
Executive Compensation is a fact of life. With the proper creation and oversight, Board of Directors and top management can accomplish the strategic growth plans and objectives and feel good about how they are compensating their key personnel for the short and long range. They can also have sweet dreams in their own beds.