Management Compensation – The Elements & Importance

Imagine your senior managers walking out the door tomorrow. Things would get messy in the organization pretty quickly, right? Managers and leaders are crucial to a company, so it’s important you pay them what they deserve. Getting management compensation right should be one of your top priorities.

Why You Have to Do Management Compensation Right

Management compensation, otherwise referred to as executive compensation, is the compensation and benefits package you offer your managers and leaders.

It’s up to these people to make important decisions, guide employees, and offer ongoing support. They are constantly under pressure to keep up with industry trends and shifts in company practices. Managers must keep everyone happy – and that’s a tricky responsibility to balance. Employers should do anything they can to keep them satisfied.

An important part of job satisfaction is job compensation. Management compensation consists of a number of elements. Some are fixed, while others are variable. No one approach is best. They come together to form the right benefits package.

Elements of Management Compensation

1. Base Pay– Like any employee, managers earn a fixed base salary. This is calculated based on market values, what similar companies pay for the same position, and individual expectations. Consider what your company can afford. Average market values may be much higher than your company’s budget. You must take into consideration the location and cost of living.

2. Benefits – Benefits are another basic element of compensation. This depends on what you have to offer and what your managers need. They could include car allowance, retirement plans, and health insurance. Special “manager only” perks could include travel allowances or club memberships.

3. Bonuses – A portion of management compensation is determined by company performance. This is determined by the results that teams and individuals deliver. Managers, therefore, have more of a drive to ensure the team can reach or exceed short-term targets. The incentive comes in the form of bonuses, usually cash-based.

4. Stocks/Equity– You can provide equity or stock options as part of management compensation. This means managers have a direct financial stake in the company’s performance. The more successful the results, the more valuable their equity or stock options become.

5. Long-Term Incentives – Long-term incentive plans compensate managers for meeting strategic goals. These improve the company’s performance over a longer period, involving a lot more planning and revising. This compensation can include stock options, performance shares, or cash bonuses.

Incentivizing Performance

Compensation choices must be well calculated. If approached poorly, you can lose key talent, see demotivation throughout the whole team, and lose sight of company goals. Management compensation can be key to incentivizing performance.

But how can you do this? Establish short and long-term goals. Ensure that managers are clear on their priorities and have the support to juggle both. Management compensation should be aligned with your company’s goals. If the main objective is exposure, reward managers for successfully expanding the customer base. When it comes to compensation, bonuses and long-term incentive plans can help motivate these efforts.

Key performance indicators (KPIs) have long been an effective motivator in the workplace. These tie the business goals to compensation. Most tasks require a team effort. Managers help individuals and advise teams to optimize performance. Meeting KPIs is therefore tied to management compensation. Rewards can be both monetary and non-monetary. Your team may want more flexibility or development opportunities.

Final Comments

An effective compensation strategy should be fair and competitive. It’ll adapt to individual performance and shifting business needs.

Determine what elements of your management compensation plans you’ll prioritize. Consider the industry, your competitors, the size of teams, and individual preferences. Fixed compensation is stable and predictable. Variable compensation works as a challenge, incentivizing growth.

Ultimately, the goal is to retain talented managers who can lead the company to success. They are the heart of the organization, depended on by a lot of people. Getting management compensation right has a ripple effect.