7 Current Factors That Influence Executive Compensation for Their Roles was originally published on Ivy Exec.
Executives play a role in managing employees, overseeing projects, and leading departments. These responsibilities come with an attractive compensation and salary package, which can vary based on various aspects.
If you’re eyeing an executive role, you might be curious about what influences the amount paid for such positions. Understanding each factor can help you know the pay to expect when applying for a new job. You can also use the information to negotiate better pay when offered a promotion.
Here are seven factors that currently influence compensation for executive roles.
1️⃣ The Size of the Company and Its Complexity
The responsibilities of an executive role often depend on a company’s size. A large firm will have more staff, clients, and therefore more work. Executives will be in charge of many decisions and projects, which is reflected in their pay.
Large companies make more profits and pay their executives other benefits besides the base salary. For example, they may offer quarterly or annual bonuses and stock ownership.
Smaller firms and startups make less money, and their executives have fewer responsibilities. Thus, they can’t afford to pay the same amount big firms offer. A CEO at a startup earns about $100,000-125,000 annually. On the other hand, those working for Fortune 500 companies make over $15 million per year.
2️⃣ Industry Performance
Some industries, like tech and healthcare, generate significant revenue. While they can have fluctuating profits due to innovations, they quickly adapt to market changes. Executives working in industries that perform well, such as these two, often earn a lot.
Tech advancement and shifts in consumer wants are causing some industries to decline. For example, newspaper publishing is decreasing as more people read online.
Execs working for declining industries earn less than those in fast-growing sectors. Employers can’t commit to paying a high amount if they aren’t getting good returns and their companies have an uncertain future.
3️⃣ Competition
The law of demand applies to many situations, including how much executives earn. The more people need your skills, the more companies will be willing to offer you to work for them.
No employer wants to lose an executive that generates a lot of profit. In sectors with high competition, like finance, companies often want to hold on to well-performing employees. As a result, they offer competitive compensation to stay ahead of other firms.
Some executive roles demand fewer qualifications, especially in a less challenging field. Such roles are easier to fill than those with more demanding duties. An executive working in a role that doesn’t demand much will most likely get less pay than someone who needs more skills to do their job.
4️⃣ The Economy
Production factors like the cost of materials and labor affect profit. If a firm spends a lot of money on one output unit, the profit will also be less.
Economic changes affect the compensation executives receive for their roles. Companies look for ways to reduce costs when an economy isn’t doing well. For example, they can cut salaries or take away some financial incentives. They may also let go of execs earning a high wage to rehire and offer a lower amount.
When inflation is low, companies spend less on production and service delivery. Likewise, consumers spend more money because they have more disposable income. These factors boost sales, which ultimately reflects positively on executives’ paychecks.
Other economic factors that affect executive compensation are:
- Exchange rates
- Taxes
- Interest rates
- Product and service demand
5️⃣ Experience
While most factors that affect how much executives earn are external, the pay will also depend on a job candidate. If you have significant job experience, you will likely add a lot of value to the firm that hires you. As a result, employers will offer you better pay than someone with less experience.
Extensive experience allows executives to do their jobs better. You are less likely to make mistakes if you’ve done the same or similar job for several years. Firms offer executives with more experience better pay since they are more efficient. Their high productivity boosts profits, retains clients, and helps employers avoid losses.
6️⃣ Performance
Many companies are embracing performance-based pay due to its benefits. This method motivates executives to deliver better results. It also rewards hard work, which ensures fair compensation across all ranks.
Employers do annual performance reviews and adjust executives’ compensation accordingly. They may reward you with a higher salary if you do your job well. On the other hand, they may fail to increase the pay and deny some incentives if you don’t meet expectations.
Employers look at various factors when conducting reviews to determine executive compensation. For example, they measure the quality of work based on your accuracy. They will also check how effective you are at your role and the resources you use to complete tasks.
Leadership skills are another aspect employers consider when appraising executives. They assess how well you manage people who work under you. Additionally, they review how you delegate tasks and whether you inspire other employees. You boost your chances of getting better compensation if you have impressive leadership skills.
Here are other factors considered during performance reviews:
- Interpersonal relationships
- Job Knowledge
- Talent development
7️⃣ Alignment With a Role
Sometimes, employers promote their staff because they’ve been at a company long, even if they don’t have all it takes to do the job. They may also do this if an employee is already overqualified for their current position.
If an executive’s skills don’t perfectly align with a role, they will likely need assistance. The employer might appoint someone else to oversee the work and avoid costly mistakes. They may also have to spend additional resources on training. As a result, executives who aren’t a great fit for their role tend to earn less than those who are.
Learn More About Executive Compensation
Executive compensation mostly depends on the ability of a company to make profits. If external factors are favorable, employers are likely to offer better pay. This is also true if your skills make you more competitive and efficient.
Would you like more information on executive compensation trends? Register with Ivy Exec today.
