One of the things that CEOs and boards worry about the most is their executive team’s vulnerability to poaching by other companies. That’s especially true when it comes to the risk of losing top executives — even the CEO — to someone who offers a higher compensation package to lure that person away.
Thanks to some research by the firm Farient Advisors, we now have a way to visually assess the vulnerability of your executive team, which can then inform your compensation strategy moving forward.
The Talent Vulnerability Heat Map
Every business worth its salt conducts compensation studies to better understand how it matches up with its industry. Typically, that research digs into the wage, salary, or direct cash compensation of employees. The goal is to assess whether you, as a company, pay below market rate, at an average rate, or above market. You can then use that information to see where you might risk losing talent and adjust your compensation strategy.
Interestingly, the Farient talent vulnerability heat map combined the cash compensation comparison on the horizontal X axis with an analysis of where someone stands relative to their industry.
That range extends from paying 15 percent — or well below market average — up to 85 percent, a healthy above-average rate.
The thinking has long been that employees are much more receptive to poaching the lower they appear on this spectrum.
However, the Farient heat map shows how long-term, equity-like compensation can also mitigate an employee’s vulnerability to leaving.
The Equity Factor
On its vertical Y axis, the heat map adds long-term compensation factors like stock or other equity products and compares them to the direct cash compensation paid to an employee.
On the chart, this ranges from 1x for CEOs up to 3x of their annual cash compensation. For example, if a CEO’s salary is $300k a year, their long-term compensation could range from $300,000 up to $900,000 or higher.
The chart also incorporates a similar measurement for other executive team members, like the COO or CFO, but the multiple for their long-term incentive is half that of the CEO.
As you might imagine, the better compensated employees are, the less receptive they become to poaching.
Assessing Vulnerability
Once you have the compensation numbers for your CEO or executive team members — both salary and long-term incentives — it simply becomes a matter of finding where they land on the heat map to help you assess how vulnerable they might be to getting poached.
Suppose your CEO or executive is paid at an above-average rate salary — 65 percent or higher — and they receive a solid 2x that compensation as a long-term incentive. In that case, you can see that they fall into a low vulnerability zone.
On the flip side, as would seem obvious, anyone paid less than a market average rate coupled with a 1x long-term incentive will fall into the red zone of becoming highly vulnerable to leaving for a better-paying job.
Things become more nuanced when employees fall into different areas. For example, they might be paid at a more average annual rate but also highly compensated for a long-term incentive. Similarly, someone paid an above-average annual rate but with a below-average long-term incentive also falls into a more nebulous zone.
Anyone falling into these other quadrants should drive some discussions and decision-making among the board or the CEO to help assess how vulnerable they might be and how you might mitigate the risk of that happening.
A Fresh Look at Compensation
What I love about the Farient heat map is that it gives us a fresh and powerful way to assess our compensation strategies at an individual level. It’s all about helping you assess the risk and vulnerability of your talent. It’s elegantly simple to put in place and instantly gives you actionable information to analyze, discuss, and debate. It might even help you understand better why someone left the firm — and how you can prevent that from happening again.
