If you’ve ever compared your personal finances to that of an executive in any particular company, you’re bound to notice quite a few differences in how you’re paid and the sheer amount you’re paid. It’s no secret that executives make quite a bit more money than most of us. So why do executives in companies make so much more money than the rest of us?
First, you should understand that executives are held to a different standard than most employees, as they’re literally responsible for how well the entire company is doing. The idea behind this is that they need to keep their company running well and they’ve got to keep their share holders happy; when they do, they get rewarded.
This is a great deal of pressure for just one person, which is why any executive search firm will set out to find the best of the best.
In that same token, whatever the executive is making at the top tier of the company, it’s a good starting point for what the other employees in the company are expected to bring in on the lower levels of the chain. So it’s actually a good thing if an executive is making quite a bit of money, it means that the others below them will as well.
When it comes to their actual annual salary, only a small part of that is actually comprised of an executive’s base pay; most of it is actually those rewards and incentives that are mentioned above. The IRS has designed certain practices to keep executives from taking too much of a base pay, so the actual number is probably less than one million a year.
A large portion of an executive’s salary comes from bonuses, which are achieved both yearly as well as in two or five year chunks. When it comes to their annual bonuses, they get these only as long as their company is performing to the set standards outlined by the original agreement. The shareholders have a hand in shaping these standards.
More often than not, in order for executives to get their annual bonus, they not only have to perform for that year, but they have to perform better than the projected rate. Their bonuses are typically tied in to beating their sales plans by certain percentages – the higher they beat the plan, the higher their bonuses rise. This is a pretty difficult thing to accomplish, but it is demonstrably achievable and if the company manages to succeed, the executive will see their bonus at the end of the year.
When it comes to their other bonuses, such as the ones that come every few years, it’s directly related to not only sales and profits, but also projects or implementations. If the company has something they’re planning to hit or achieve in the next five years, the executive will only get that bonus if they hit that goal within the time frame. They have to do this while retaining the yearly profits as well.
Executives do make quite a bit more money every year than most people, but it’s with good reason. They have a lot of different objectives and goals to hit in short periods of time and everyone is looking at them to make sure that these goals are met successfully. It’s a lot of pressure for just one or a few people, so they’re compensated accordingly.