Be Wary of the COVID Compensation Hangover

This time of year, there are the usual surveys and articles about merit increases and executive pay increases.   

For example, I saw a recent private company survey that said that more than 46% of organizations in the US plan to provide a more than 6% increase to the merit pool.  Similarly, I have seen many articles commenting on the ‘astounding’ increases in executive pay. 

However, you must be very wary of year over year comparisons, especially after a multi-year period where companies all took differing approaches to weathering the COVID hurricane. Because, as usual, there is no context given. 

What is not said is: how many of the companies responding gave no increases during the pandemic; how many of those execs took significant pay cuts and no bonus during the pandemic; how many of those have just been restored to their pre-pandemic pay; how much of the pay ‘increase’ is really just due to rebounding stock value.

The practical reality is that there are several national surveys that have reached a general consensus on the merit pool increases being offered for 2023 – most have agreed this will be generally in the 4% range. While this materially lags the costs of living increases that employees have been experiencing, it is a focus on cost of labor, which is expected to increase by the 4% (it should be noted that merit pools have been at or above 3% for the last 4+ years despite inflation for several of those years being at 1% or less).

So when it comes to determining executive pay, we suggest you ignore the noise and focus on fundamentals.  Are your salaries reasonable given the competitive market and the scope and complexity of your business? Is the bonus target and leverage appropriate? Are the metrics true drivers of value creation for stakeholders? Do your long-term incentives adequately align management with shareholders? Quality begins with these fundamentals, and if you can answer these questions in the affirmative, you do not need to pay attention to the media din around compensation. 

But, if you find that you need assistance in answering these, then this is where we can help. With a range of long-term expertise in compensation strategy and pay philosophy, OrgShakers are able to help your company navigate the reality of executive pay increases so that it is a true reflection of the current economic context. To get in touch, either head over to our contact page or email me directly at chris@orgshakers.com