ESOP company leaders face all the usual challenges in setting executive compensation as well as a few that are unique. If you think of a well-constructed executive compensation program as a house, the outside compensation study is one tool that you have at your disposal to help build the house, but you must use the tool appropriately. Some companies treat compensation studies as a hammer and use them to whack every compensation issue that surfaces, while some companies never use this tool at all. The answer is somewhere in between, and this article discusses the proper use of this tool.

This article first discusses why companies use compensation studies, including a brief discussion of how compensation studies tie in to the governance process. It then goes into some detail regarding the types of studies available and what they do and do not contain. From there it discusses the process for selecting among the available studies and for matching jobs to the positions covered in the studies. Finally, it shares thoughts on how to use the data obtained from the study by viewing its use in the broader context of setting compensation, with a special focus on long-term incentives…