Executive Compensation: Benchmarking Middle Market CEO Pay

Much has been discussed about the compensation of Fortune 500 CEOs. However, far less is known about executive pay packages at Middle Market companies, many of which remain private and are not required to report that information. Lack of benchmarking data complicates decision-making for the boards of such firms, which compete with large corporations for top talent. As for Middle Market CEOs, many have spent large swaths of their careers - in some cases their entire professional lives—at one firm. Consequently, they have little idea how their compensation stacks up against counterparts in comparably sized and larger companies.

Virtually all information about CEO compensation in the United States comes from studies of approximately 1,500 large public companies covered by the S&P Execucomp database. To broaden that knowledge, National Center for the Middle Market Fellow Berk A Sensoy examined compensation data for more than 11,000 firms between 1997 and 2011, obtained from S&P's Capital IQ database. The Capital IQ data includes Execucomp firms, but most derives from companies that are much smaller, more volatile, and less profitable than those previously studied. It also includes a number of private companies. Sensoy identified key similarities and differences in executive pay practices at large and Middle Market companies.

To help boards and CEOs benchmark pay at their own companies, the National Center for the Middle Market has developed a Middle Market CEO Compensation Tool based on CIQ data. The tool compares a CEO's compensation package (salary, cash bonus, restricted stock award, stock grant, stock options and other compensation) with the range of CEO compensation packages for other companies in the same revenue range, industry group, and state.

From Sensoy's analysis of the CIQ data, key similarities and differences were identified in executive pay practices at large and Middle Market companies. Among Professor Sensoy's findings were:

1. The pool of top CEO talent is small and competitive among all companies.

Sensoy determined that CEOs in general--not just CEOs of large corporations - represent the highest levels of business talent in the labor force. A single CEO labor market serves both large and Middle Market companies, increasing the challenge to lure top talent. Large firms compete for CEOs with the highest skills levels, who are best equipped to lead organizations at that scale. Larger companies also pay more than Middle Market companies to attract those top performers.

However compensation depends not only on an individual executive's ability, but also on the aggregate demand for CEO talent. Compensation is then also affected by the general level of CEO compensation or--to the extent CEO labor markets are segmented - to the level of compensation in a particular industry.

2. Middle Market companies structure compensation differently.

The structure of CEO pay packages is a separate issue from overall compensation levels. Middle Market company profits are more volatile in percentage terms - that is, in terms of returns on total capital - than the profits of large companies. However, because of their size the actual dollar swings are much smaller. Consequently, Middle Market pay packages are tied more closely to actual dollar returns than pay packages in large companies. CEOs of firms that have the smallest dollar swings in profits from year to year earn about $3,000 for every $1 million in returns to shareholders.

CEO compensation is less sensitive to market forces in midsized companies than in large firms. Across the board, CEO incentives respond about as much to a "lucky dollar" (profit that derives from good times in the economy or the industry in general) as to a "skillful dollar" (profit from outperforming competitors). Although Middle Market CEO compensation is much less sensitive to both lucky and skillful dollars. This is perhaps inevitable given the more intense analyst, institutional investor, regulatory, and media scrutiny of larger firms.

Leverage our Executive Compensation Benchmarking Tool to compare your CEO's pay to peers in the same industry, region, and revenue band.

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