Benchmarking using annual compensation—base, bonus and deferred pay—provides clearer insights into salary arrangements

May 10, 2019

Chart-topping take-home pay figures certainly get the attention in salary reports like the one published last issue by CEO Update, but when benchmarking compensation, researchers advise taking a different approach.

Annual compensation, a term developed and defined by CEO Update researchers, is a more accurate way to measure pay, because it ignores one-time payments. Instead, it includes the annual deferred contributions an organization makes toward an executive's retirement.

Back in 2008, the IRS created a treasure trove of information on compensation when it standardized and expanded salary reporting for executive staff in tax-exempt organizations. Those new rules required organizations to split pay into five segments on Schedule J of the Form 990: base compensation, bonus and incentive compensation, other reportable compensation, retirement and other deferred compensation, and the value of nontaxable benefits.

The first three categories—base, bonus and other—represent take-home pay, which equals the amount reported on an individual's annual W-2 filed with the IRS. This amount includes one-time payments received in the calendar year, such as retirement payouts and even severance, which can distort averages and medians, especially in smaller datasets.

Annual compensation, however, disregards those one-time payments in the other category. Instead, annual compensation includes the amounts in the base and bonus columns, plus the amount in the deferred compensation column. In the vast majority of cases, the deferred column represents payments the organization has contributed toward retirement plans, such as traditional 401(k)/403(b) plans, but increasingly those payments also go toward supplemental executive retirement plans (SERP), such as 457(b) and 457(f) plans.

In a small minority of cases, the deferred compensation category is used to identify a bonus earned one year but paid in the next year. While rare in associations, distinguishing deferred bonuses from deferred retirement payments requires closer examination of the tax document.

Benchmarking using annual compensation, though, can be welcome news to those looking to boost their salary during contract negotiations. Annual compensation figures are more inclusive of important cash benefits that are often part of the recruitment and retention process, and annual compensation medians are often higher than take-home pay medians.

Case in point, the median take-home pay in CEO Update's most recent salary report of chief executives in large associations was $565,407, but the median annual compensation was $598,588, higher by 5.9%. In last year's report of CEOs at midsize associations, the take-home pay median was $316,755 but the annual compensation median was 6% higher at $335,775.

Proper benchmarking does need to consider when the individual was hired, because first-year executives often don't get paid a full bonus or receive full contributions toward retirement plans.

The IRS disclosures also don't reveal the full range of potential bonus pay—and how much more an executive might have earned. Modern incentive structures are paid out in accordance with meeting specific goals. If the executive fell short of the mark, he or she could have forfeited a part of the potential bonus.

COMPARING TAKE-HOME PAY WITH ANNUAL COMPENSATION