Why do many organizations administer executive compensation differently from compensation of lower-level employees?

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Posted on (Answer #1)

The major reason for this is that executive performance must be measured in a way that is very different from the way that employee performance is measured.  It would not make sense to pay executives in the same way that regular employees are paid.

Regular employees are typically paid a flat rate for showing up and doing the work that is assigned to them.  Some employees do get paid based on the quality of their performance and such, but they are still basically being paid on production.  The problem with doing this for executives is that that is not consistent with how they provide value for the company.

Executives do not provide value simply by showing up and working.  Instead, they provide value by managing to improve the company’s performance.  This is something that cannot be measured by the number of hours worked or by the number of documents produced.  It can only be measured by the overall performance of the company as determined by profitability, share prices, and things like that.  For these reasons, executive compensation is often managed differently than the compensation of any other employees.

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