What Is Market Compensation?

Welcome to Headhunter Secrets, where I’ll share perspectives about the search business. We hope you’ll use our services to execute searches. Nonetheless, I wanted to give you some insights I’ve gained from doing search work since I was 23 years old.

Headhunter’s Secrets:
What Is Market Compensation?

We get this question all the time, from both companies and candidates. Companies want to figure out their costs, and hopefully keep them manageable. Candidates want to make as much money as possible, or at least make the sort of money peers they admire make.

The answer to this question is nuanced. There are several variables that influence it. Let’s start with the easy answer…

Similarly-sized companies, be they publicly held or private, that are in similar industries, tend to pay the same. 

There’s another nuance that influences compensation—a company’s margins. Companies in industries with big gross margins tend to have more free cash flow to pay higher cash compensation. High-margin companies tend to pay more than low-margin companies.

Consider the difference between a software company that makes something once and sells it a million times at little extra cost compared to a retailer that must design and produce new inventory for all five selling seasons. Brick-and-mortar, in-house retail has way more moving parts than software does, not to mention physical inventory that rapidly depreciates, both of which amount to lower margins and less free cash flow to pay labor. 

That said, large margins don’t guarantee more free cash flow. Consider those companies that have large margins but might also have mandatory capital investment that requires financing. Here again, there’s less free cash flow to pay compensation. 

So what, then, is market compensation?

If you’re a public company worker, then you’re working for a company that hires compensation consultants to tell them how to pay relative to their public company peers. Similarly sized public companies in similar industries will pay similar compensation. Executives working at publicly-held companies have the advantage of being able to review their similarly-sized competitors’ Def 14A filings to determine market compensation

The private world is different. There are compensation consultants who help private companies achieve compensation rates on par with peers. But these consultants lack access to most private company payrolls to give accurate guidance.

When companies ask about market compensation, my answer is always the same: Market compensation is what a company can afford and what fits the company’s pay structure.

When candidates ask me about market compensation, my answer is always the same: Market compensation is what a company can afford and what fits the company’s pay structure. A company is unlikely to make a dramatic change in compensation for just one hire, as it would create uproar and discontent within the company.

When a company is under financial duress and must save cash, they will, for a period, pay “below market.” Yet what they can’t pay in salary they can make up for in experience. To work for a company amid a turnaround offers candidates the opportunity to learn invaluable lessons. As I like to say…

Experience is what you get when you didn’t get what you wanted.

All experience during periods of duress makes everyone smarter. And the smarter we become, the more valuable we are, which eventually turns into higher compensation. 

Hope these insights are helpful.

We at Leyendecker have been doing search work for 40 years. We’ve completed over 100 C-level searches, most for CFOs. Most have been PE portfolio companies, but we’ve also helped owner/managed and publicly-held companies. Our placements have helped their employers go through almost 50 successful liquidity events.  

Keep us in mind when you seek talent that will get you over the goal line! Hope you have a great year!

Sincerely,
Doug

doug@leyendecker.com