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AMA: Executive Compensation for Startups

| May 25, 2022 5:00:00 AM | By

 

Executive compensation is a complex and consequential topic for startup founders and CEOs to consider. That’s why we sat down with OpenComp’s Senior Compensation Consultant, Jason White, to discuss exactly how to approach this piece of startups’ compensation advantage.

 

There’s a perception that managing compensation for executives is more complex than for other job levels. Is that true? 

 

There are two reasons for added complexity around executive compensation: experience and equity. 

 

First, executive level positions encompass a wide range of experiences and subsequent salaries. For example, you might have a VP candidate who came from a very prominent company with years of experience in the role, as well as another candidate who has risen through the ranks but is new to executive leadership. These employees would earn very different amounts.

 

Second, delivering attractive equity offers is critical for landing executive hires, but they typically require sign off from the board and have serious implications for the business. ​​Equity is also harder to grasp than traditional salary compensation, because it doesn’t always translate into an easily perceived dollar value, especially early on in the company lifecycle. 

 

How do you recommend pre-IPO companies manage executive pay? 

 

While executive pay is more complex than broad-based employee pay, they should be approached with the same method:

 

  1. Acquire Benchmark Data: Start by acquiring a reliable and relevant data source for your organization to benchmark against. 
  2. Job Leveling: Calibrate the roles within your organization to match your data source’s job architecture.
  3. Market Analysis: Use your new data and architecture to understand what others in the market are paying for executive positions.  

 

Because executives wear many hats, following this process at the executive level is particularly important. For example, early-stage CFO’s often oversee Human Resources, IT & Legal. They should be compensated for these additional responsibilities. 

 

Data shows that negotiations often facilitate better outcomes for male executives, should companies that strive for pay equity allow for salary negotiations?

 

Best practice tells us that we should always put forth the best and final offer the first time we offer a job to a candidate. This ensures that no one employee gets a compensation advantage over an equally qualified other, for reasons that aren’t based on competitive benchmarks.

 

That said, experience levels vary widely at the exec level, and it’s appropriate to pay executives differently based on experience, as well as job function. 

 

To reduce exorbitant differences in executive comp, you can begin with broad pay ranges between the 25th and 75th percentiles and make pay decisions using those ranges based on experience and function. That way, you’re not starting from scratch every time you want to make an offer. 

 

Remember, how you pay your executives helps drive the compensation philosophy for the rest of the organization. So, whatever you decide, make sure your approach is fair and sustainable. 

 

What are some of the top questions you hear from clients around executive compensation?

 

A question I often get is when to pivot a startup’s compensation approach to look more like a public company. In other words, when to stop offering low cash/high equity offers and start offering higher cash salaries with performance based bonus plans. While every business is different, I typically tell folks that if you are beginning to ask that question, you are probably mature enough to start taking actions to change your approach to compensation.  It’s something we recommend take place gradually (over 2 or 3 comp cycles) rather than all at once.

 

The second is around equity refreshes. I tell clients that executives who are on a four year vesting schedule should receive a refreshed package at the end of that term — and you should communicate the event long before it occurs, so executives aren’t tempted to begin a job search. Fortunately, you already have a sense of how these executives perform, so you can refresh their equity accordingly.

 

To learn more about executive compensation, check out our eBook on The High-Growth CEO Guide to Executive Compensation.

 


 

How can a pre-IPO company confidently articulate the dollar value of equity when discussing compensation with candidates? And at what stage do companies generally begin thinking about utilizing equity as a dollar value as a benchmark?

 

Pre-IPO companies can assign an approximate dollar value to their equity shares. However, this is more easily done in the later stages of a company, after four or five rounds of funding. At a young company, you really have no idea what the value of a share will one day be worth, as it depends upon a number of factors. 

 

One major factor is dilution. Dilution is determined by the amount of outside investment the company has to raise in order to grow. Most companies raise funds from venture capital, private equity, or angel investors, and all of those entities want their own piece of the equity pie. 

 

Companies in the later stages can make data-based assumptions as to what their employees’ stock options will be worth in the future by using their own historical data or looking to competitors who have already gone public or been acquired. Having this predefined dollar amount can be very useful for recruiting in-demand executive talent pre-IPO. 

 

For example, let’s say a company plans to go public in two years, but needs the expertise of a seasoned CRO to help get them there. Offering equity at the intended dollar value can help the candidate understand the potential full value of their offer. However, it is important to be careful when promising executives an excessive payday that cannot necessarily be guaranteed.

 

Can leveraging equity as a dollar value help promote pay equity practices within the executive levels?

 

Absolutely. Being able to offer equity as a dollar value is a huge milestone. Once you have that figure, you can build structure into both executive and broad base pay that will minimize, or even eliminate, any pay equity issues. 

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Jason White has served as a compensation consultant since 2009, working with some of the world’s fastest growing companies, including Airbnb, DataRobot, Medium, and Reddit. He currently serves on OpenComp’s Services team and graduated from the University of Pennsylvania. Connect with him on LinkedIn here.