Executive compensation, a critical lever for any organization, is intended to achieve three fundamental goals: attract and retain exceptional leadership talent, robustly reward demonstrable results, and foster a long-term commitment to the company’s success. However, the reality for many organizations is that compensation decisions, even those made with the best intentions, can inadvertently undermine performance and jeopardize retention. This often stems from outdated benchmarks, poorly designed incentive structures, and a tendency to treat executive pay as a routine budgeting exercise rather than a strategic imperative.
A recent comprehensive study by Chief Executive Group Research, surveying 1,551 U.S. companies, has illuminated the vast discrepancies in how businesses approach executive remuneration and, more critically, the frequent oversight of practices designed to genuinely link compensation with performance. The findings reveal a landscape where executive pay can vary enormously based on company size, industry, and ownership structure, rendering broad market averages a questionable foundation for compensation strategies. This underscores the urgent need for CEOs and boards to rigorously question their current compensation philosophies and practices.
The study highlights a significant gap in long-term incentive planning, with 57% of private companies reporting no formal long-term incentive plan. Among those that do implement such plans, fewer than one in five exclusively rely on performance-based vesting, indicating a prevalent reliance on time-based vesting or a lack of performance linkage altogether. This oversight can lead to executives being compensated for tenure rather than for the tangible value they create.
There is no singular, universally applicable formula for perfecting executive compensation. However, adherence to core principles can significantly help companies avoid overpaying for undesirable outcomes or undercompensating for talent that is indispensable to future growth. The following ten critical questions, presented as commandments, offer a framework for CEOs and boards to rigorously evaluate and refine their executive compensation strategies, ensuring that every compensation dollar is an investment in sustained organizational success.
The Strategic Imperative of Executive Compensation
The primary objectives of executive compensation are well-defined: attracting top-tier leaders capable of navigating complex business environments, incentivizing them to achieve ambitious performance targets, and cultivating a sense of loyalty and commitment that encourages them to remain with the organization through both prosperous and challenging times. When these objectives are not met, the consequences can be far-reaching, impacting employee morale, shareholder value, and the company’s overall trajectory.
Many organizations fall into the trap of viewing executive compensation as an annual administrative task. Salaries are adjusted, bonuses are approved, and benefits are renewed, often without a deep dive into the underlying strategic rationale. This perfunctory approach, as Chief Executive Group Research’s findings suggest, is a potentially costly oversight. The study reveals a stark reality: a significant percentage of private companies lack formal long-term incentive plans, and those that do often fail to tie them exclusively to performance metrics. This disconnect between pay and performance is a recurring theme, suggesting a systemic issue in how executive rewards are structured.
The sheer variability in CEO compensation, influenced by factors such as company size, industry sector, and ownership structure (e.g., publicly traded vs. privately held, private equity-backed), renders simplistic benchmarking against broad market averages insufficient. A compensation package that is competitive for a small, privately held business might be woefully inadequate for a large, publicly traded corporation, and vice-versa. This necessitates a nuanced and tailored approach to compensation design.
Ten Foundational Questions for Executive Compensation
To navigate this complex landscape and ensure that executive compensation serves its intended strategic purpose, CEOs and boards must engage in critical self-examination. The following ten questions, framed as essential principles, are designed to provoke thoughtful discussion and drive actionable improvements.
1. Benchmarking Against the Right Peer Group
A fundamental misstep in compensation planning is benchmarking against an inappropriate peer group. The Chief Executive Group Research study provides stark data: in 2025, median total CEO compensation ranged from $189,116 for businesses with less than $2 million in annual revenue to $2.2 million for those generating between $1 billion and $9.9 billion. Industry and ownership also play significant roles, with CEOs of private equity-backed companies earning a median of $583,367, a substantial 33% above the overall private-company median.
Therefore, a compensation benchmark that fails to account for these critical differences is inherently misleading. A salary of $300,000, for instance, could be considered highly generous in one context and decidedly uncompetitive in another.
| Ask yourself: Are we benchmarking pay against companies that we genuinely compete with for executive talent? This question forces a strategic alignment between where the company seeks its leaders and where those leaders are likely to be drawn from. It moves beyond generic industry averages to a more practical, talent-acquisition-focused perspective.
2. Paying for Performance That Matters
A bonus should represent more than just an acknowledgment of completing another fiscal year. While research consistently shows a correlation between executive bonuses and company profitability and revenue growth, the true challenge lies in strategically linking rewards to performance. This involves identifying not only what management can influence but also, crucially, which results are most vital to the business’s long-term health.
An incentive tied solely to revenue growth, for example, might inadvertently encourage rapid expansion without sufficient consideration for profitability or cash flow management. Conversely, a stringent cost-reduction target could yield immediate savings but potentially compromise long-term capabilities and innovation. The goal is to incentivize actions that create sustainable, enduring business value.
| Ask yourself: Are we rewarding executives for creating lasting business value, or simply for hitting annual numerical targets? This probes the depth of the performance metrics used. It questions whether the incentives align with a holistic view of business success, encompassing profitability, innovation, market share growth, and stakeholder satisfaction, rather than a narrow focus on short-term financial gains.
3. Building a Balanced Compensation Plan
A well-constructed compensation plan typically incorporates several components, each serving a distinct purpose. Base salary provides a stable foundation. Annual bonuses reward near-term achievements. Long-term incentives (LTIs) encourage executives to focus on the company’s future growth and sustainability. Benefits, ranging from health insurance to retirement plans, can enhance the overall attractiveness and security of the compensation package.
The Chief Executive Group Research study revealed that 57% of private companies lack a formal LTI plan, leaving many to rely predominantly on salary and annual cash bonuses. This imbalance can lead to a myopic focus on short-term results, potentially at the expense of strategic long-term investments. While not every company requires equity-based compensation, every organization should critically assess whether its compensation mix is designed to foster the desired behaviors and strategic outlook.
| Ask yourself: Does our pay structure offer meaningful upside for exceptional performance, or are we relying too heavily on guaranteed compensation? This question addresses the balance between fixed and variable pay. It prompts consideration of whether the incentive structures are sufficiently robust to motivate extraordinary effort and risk-taking that drives significant value creation, or if the compensation is primarily fixed and less directly tied to outcomes.
4. Differentiating for Top Talent
While internal equity is an important consideration in any compensation strategy, treating every executive identically is neither necessarily fair nor conducive to good business practice. Some roles are inherently more challenging to fill due to specialized skills or market demand. Certain leaders may possess critical capabilities essential for the company’s next phase of growth. Furthermore, some individuals consistently contribute at a significantly higher level than others. Compensation strategies should reflect these distinctions.
This is not an argument for arbitrary exceptions or a disregard for financial discipline. Rather, it advocates for a deliberate and strategic approach to rewarding high-impact roles and exceptional contributions. Failing to do so risks incurring greater costs to maintain superficial uniformity than it would to retain the company’s most valuable leaders.
| Ask yourself: Are we willing to compensate our strongest executives differently, or is our approach to internal equity putting critical talent at risk? This question challenges the notion that strict pay parity across all executive roles is always equitable. It forces a consideration of whether a more flexible, performance-and-impact-driven approach to compensation could be essential for retaining key individuals who drive disproportionate value.
5. Preventing Pay Drift from the Market
Executive compensation packages can become uncompetitive not through a deliberate decision to reduce pay, but through a gradual erosion of relative value. Factors such as inflation, company growth, and expanding executive responsibilities can, over time, diminish the purchasing power and market standing of a compensation package.
Historical analysis of compensation data has indicated that median private-company CEO salaries, in recent years, have not kept pace with inflation, with this gap being particularly pronounced in smaller companies. The core lesson here is not that every executive is automatically entitled to an inflation adjustment. Instead, it emphasizes the necessity of regularly reassessing compensation against prevailing market rates, rather than merely comparing it to the previous year’s paycheck.
| Ask yourself: If we had to recruit our current leadership team today, would we be willing—and able—to offer them what we’re currently paying? This hypothetical scenario is a powerful diagnostic tool. It prompts a direct comparison of current compensation levels against the current market and the company’s ability to attract similar talent in today’s competitive landscape, highlighting potential disconnects.
6. Embracing a Long-Term Perspective
A company can successfully meet its annual financial targets yet make strategic decisions that inadvertently weaken its future prospects. This underscores the profound importance of long-term incentives (LTIs). Instruments such as stock options, phantom stock, deferred compensation, and other equity-linked arrangements can effectively encourage executives to adopt a mindset that extends beyond the immediate bonus cycle.
However, the design of these LTIs is paramount. The Chief Executive Group Research study found that among private companies with formal LTIs, 47% use solely time-based vesting, while 19% rely exclusively on performance-based vesting, with the remaining 34% combining both approaches. These distinct choices reflect differing organizational priorities: some prioritize executive retention (time-based vesting), others reward demonstrated value creation (performance-based vesting), and some aim for both.
| Ask yourself: Are our executives financially motivated to build the company’s long-term value, or primarily focused on this year’s results? This question probes the incentive alignment for long-term growth. It seeks to determine whether the compensation structure encourages strategic investments, sustainable innovation, and prudent risk management that benefits the company over multiple years, or if it primarily drives short-term financial performance.
7. Valuing Equity Realistically
An ownership stake in a company can serve as a potent incentive, aligning the executive’s interests with those of the shareholders. However, the motivational impact of this equity is significantly influenced by whether executives truly understand its value and potential.
In private companies, where equity is not traded daily, its appreciation may go unrecognized for extended periods. Compensation research consistently reveals that many companies fail to regularly measure or clearly communicate the gains associated with executive equity holdings. This can leave executives uncertain about the true worth of what is intended to be a significant component of their compensation. Implementing formal valuation processes and ensuring transparent communication are crucial steps in connecting performance with the potential financial rewards derived from equity.
| Ask yourself: Do our executives understand what their equity is worth—and what could make it more valuable? This question focuses on the clarity and communication surrounding equity compensation. It aims to ensure that executives are not only aware of their current equity stake but also understand the drivers of its potential appreciation and how their actions can influence its future value, thereby enhancing its motivational power.
8. Compensating for the Company You Are Building
The leadership team that successfully guided a business to $20 million in revenue may not possess the specific skill set required to navigate the complexities of scaling to $100 million. As companies evolve and grow, executive responsibilities transform. Operations become more intricate, governance demands intensify, and the competitive talent landscape often shifts. Executive compensation must reflect these evolving realities.
The Chief Executive Group Research study highlights this dynamic, noting that in 2025, median total CEO compensation reached $659,099 at companies generating $100 million to $249.9 million in revenue, a significant increase from $316,240 at companies with $10 million to $24.9 million in revenue. While companies should not preemptively pay for future roles, undercompensating for the expertise necessary to execute a growth strategy can become a significant and costly constraint on progress.
| Ask yourself: Are we prepared to pay for the leadership talent we need next, even if that means breaking with historical compensation practices? This question addresses the proactive approach to talent acquisition and retention required for growth. It challenges the organization to consider future leadership needs and to adjust compensation strategies accordingly, even if it requires deviating from past norms and potentially investing more upfront to secure the necessary expertise for future success.
9. Utilizing Benefits and Perks Strategically
The traditional executive perks package is undergoing a notable transformation. The proportion of private-company CEOs receiving a company car or car allowance decreased from 58% in 2017 to 42% in 2025. Similarly, memberships to golf and country clubs saw a decline, from 20% to 13%. Concurrently, supplemental life insurance has become more prevalent, rising from 42% to 50%.
This shift suggests a move away from some of the more ostentatious symbols of executive status towards benefits that offer greater financial protection and security. Whether this evolution reflects changing executive preferences, a drive for greater cost discipline, or other factors remains to be definitively determined. However, it raises a crucial point: the cost of a benefit to the company does not always equate to its perceived value by the executive.
| Ask yourself: Are we investing in benefits our executives genuinely value, or maintaining programs out of habit? This question encourages a critical review of the benefits package. It prompts an assessment of whether the current offerings are aligned with the actual needs and desires of the executive team, or if some benefits are retained due to inertia rather than strategic relevance and employee appreciation, potentially leading to wasted resources.
10. Conducting Annual Reviews of the Entire Program
Executive compensation should not be a static element of organizational management; it is a dynamic process that requires ongoing evaluation and adaptation. Business priorities evolve, performance expectations change, competitors adjust their compensation offerings, and the leadership capabilities a company requires today may differ significantly in three years.
Despite this inherent dynamism, annual compensation reviews can easily devolve into mere exercises in approving incremental salary increases and bonus payouts, without a fundamental re-examination of the compensation structure itself. A more meaningful review involves assessing whether the overall compensation remains competitive, whether the incentive structures effectively reward the desired outcomes, and whether the entire package strategically supports the company’s overarching goals.
| Ask yourself: When was the last time we evaluated our entire executive compensation program—not just individual salary increases? This question emphasizes the need for a holistic review. It calls for a comprehensive assessment of the compensation philosophy, the mix of pay components, the design of incentive plans, and the alignment with strategic objectives, rather than a piecemeal approach focused solely on annual adjustments.
The High Cost of Compensation Missteps
It is crucial to understand that adhering to these principles does not necessitate a company becoming the highest-paying employer in its market. In fact, a larger compensation budget can sometimes mask a poorly designed and ineffective program. A generous salary alone may not retain an executive who perceives a lack of opportunity for future growth. An aggressive bonus structure might incentivize short-term gains at the expense of long-term performance. And an attractive benefits package can fall short if it does not resonate with what executives truly value.
The ultimate objective of executive compensation is not simply to disburse more money. It is to ensure that every compensation dollar functions as a strategic investment, maximizing its impact on performance, retention, and long-term value creation. For CEOs and boards, this begins with posing challenging questions about the methodologies behind pay decisions, the behaviors those decisions are intended to cultivate, and whether those decisions genuinely support the strategic vision and future trajectory of the company they are endeavoring to build.
Perhaps the most significant compensation mistake is not violating one of these fundamental principles, but rather the assumption that the principles are being followed without ever undertaking a rigorous and honest evaluation. The continuous pursuit of excellence in executive compensation requires a commitment to regular introspection and adaptation, ensuring that pay remains a powerful engine for organizational success.
For further insights into executive compensation benchmarks across various company sizes, industries, and ownership structures, a comprehensive report is available at chiefexecutive.net/compreport.
