Benchmarking Executive Compensation: Best Practices
Best Practices for Competitive Positioning
Setting executive compensation—including salaries and overall pay strategy—at the right level is a critical balancing act. Organizations must attract and retain top talent while ensuring that the pay structure remains competitive, fair, and defensible. Benchmarking executive compensation against the market is essential to achieving this balance. Below, we explore best practices for effective executive pay benchmarking.
1. Defining the Competitive Market for Executive Compensation
The first step in executive compensation benchmarking is identifying a relevant peer group. This involves selecting organizations with similar characteristics, such as:
- Industry and sector
- Company size (e.g., revenue, market capitalization, or employee count)
- Geographic location (national, regional, or global comparisons)
A well-defined peer group ensures that executive pay is benchmarked against truly comparable organizations, providing a realistic assessment of market competitiveness.
2. Data Sources & Survey Selection
Access to reliable executive compensation data is crucial for meaningful comparisons. Organizations typically rely on a mix of sources, including:
- Custom compensation studies, which provide tailored benchmarking solutions for organizations with unique roles, competitive dynamics, or specialized markets.
- Published compensation surveys from reputable firms, offering broad market insights across industries and roles.
- Proxy statements and public filings for publicly traded companies, providing visibility into executive pay structures.
- Industry association reports that offer sector-specific compensation trends.
Using a combination of customized studies and standardized market data ensures a more precise and relevant approach to executive pay benchmarking.
3. Executive Compensation Market Positioning Strategy
Once data is gathered, companies must determine their target market positioning. Common approaches include:
- 50th percentile (median pay): A balanced approach that aligns with typical market practice.
- 75th percentile: Used to attract and retain top-tier executive talent.
- Custom positioning: Adjusted based on company strategy and pay philosophy.
Defining a clear market positioning strategy helps ensure executive pay remains competitive while aligning with business goals.
4. Evaluating Total Executive Compensation Packages
To remain competitive, organisations must take a holistic view of executive compensation packages, not just base salaries. A competitive total compensation approach includes:
- Base salary – Fixed annual pay providing financial stability.
- Short-term incentives (bonuses) – Performance-based payouts tied to annual business goals.
- Mid-term & Long-term incentives (stock options, RSUs, performance shares) – Equity-based compensation to align executives with long-term company success.
- Enhanced benefit plans – Including extended health coverage, health spending accounts, and wellness programs.
- Perks – Such as car allowances, executive medical programs, and club memberships.
- Retirement plans – Including defined benefit or defined contribution pension plans and supplemental executive retirement programs (SERPs).
- Paid time off – Including vacation entitlement, personal days, and sabbaticals.
A comprehensive benchmarking approach considers all these elements to ensure executive compensation remains competitive, attractive, and aligned with both market standards and organizational objectives.
5. Considerations for Governance and Compliance in Executive Compensation
Executive compensation decisions must align with evolving regulatory and governance requirements. Key considerations include:
- Pay transparency laws and disclosure requirements (e.g., CEO pay ratio, executive compensation discussion and analysis in public filings).
- Shareholder expectations (e.g., Say-on-Pay votes and investor scrutiny of pay practices).
- Ethical and governance concerns, such as avoiding excessive pay or misaligned incentives.
Staying informed about regulatory trends helps organizations proactively manage compliance and reputational risks.
6. Adjusting for Business-Specific Factors
While benchmarking provides a useful reference point, organizations must tailor compensation decisions based on internal factors such as:
- Executive experience and tenure
- Company performance and financial health
- Strategic priorities and unique industry challenges
By considering both external market data and internal business realities, organizations can set executive compensation at levels that are both competitive and appropriate.
Conclusion
Effective executive compensation benchmarking is more than just comparing numbers—it requires strategic decision-making. By defining the right peer group, using credible data, balancing pay components, and aligning with governance best practices, organizations can ensure their executive pay remains competitive, fair, and aligned with their long-term business goals.
How Can WCBC Help?
At our firm, specialization is key. We’re a dedicated team singularly focused on compensation and benefits consulting, including Executive compensation. Unlike general HR firms that cover a broad spectrum of human resources functions, our expertise lies in the nuanced landscape of optimizing compensation structures and benefit packages. This laser focus allows us to stay at the forefront of industry trends, regulations, and best practices, providing our clients with tailored, informed, and innovative solutions that drive both their organizational and employee success.
Options:
Check out our comprehensive suite of 12 salary surveys, including our Executive Compensation Survey. Spanning cash compensation across 540+ positions, these surveys also encompass specialized reports focusing on Group Insurance & Retirement Benefits, Compensation Policies & Practices, and Executive as well as Board of Director compensation. Check out our Salary Reports webpage to find out more.
