As your company scales, however, managing an ever-growing set of priorities can prove difficult, even impossible. Executive Compensation 01/08/2021. Other creative policies may not only cost less but they also may better suit the interests and needs of executive recruits. Questions about an article? Self-insuring smaller claims also conserves cash. To gain some insights into the matter I am planning to attend a special session of the Technology Executive Roundtable on Atlanta technology executive compensation tomorrow. Equity is the great compensation equalizer in startup companies—the bridge between an executive’s market value and the company’s cash constraints. Any startup that is either not turning a profit yet or just beginning to after a lengthy period of developmental costs simply cannot compete with that on a dollar-for-dollar basis. Investors and shareholders must decide how much dilution of equity they are willing to accept to provide an appropriate equity pool for the management team. For companies that plan to grow more slowly over the first three to five years, resist acquisition offers, and maintain private ownership, the stock alternative may not be optimal. Without an entrenched personnel bureaucracy and long-standing compensation policies, it is easier to tailor salaries and benefits to individual needs. And the resale restrictions created golden handcuffs without forcing executives to wait to buy their shares. All Rights Reserved, This is a BETA experience. One startup learned this lesson after it polled its employees. No startup is an island, especially when vying for talented executives. They consulted other software startups and documented that second-tier employees typically received 1% to 3% ownership stakes. In its ideal form, equity compensation aligns the interests of individual employees with the goals of the company they work for, which can yield dramatic results in … Executives may receive options on 1,000 shares of stock, but only 25% of the options vest (i.e., executives can exercise them) in any one year. You can start with 5% off the bat and add a point year by year. One thing to keep in mind, though, when considering how large of a slice the CEO gets is how much equity will remain in the option pool afterward for other key employees sought later. Stock options are another choice, and they generally come in two forms: incentive stock options (ISOs) and nonqualified stock options (NSOs). Tax laws impose stiff technical requirements on how much stock can be subject to options, the maximum exercise period, who can receive options, and how long stock must be held before it can be sold. But the wisest approach is to go slowly, to make enhancements incrementally, and to be aware at all times of the cash flow, taxation, and accounting implications of the choices you face. So it set up writing boards in the cafeteria, provided all employees with daily lunches from various ethnic restaurants, and encouraged spirited noontime discussions. The earliest days of your own role as CEO in the company can seem pretty straightforward: You're knee-deep in sales, product development and financials. Of course, if companies generate taxable income before their executives exercise their options, lack of a deduction is a definite negative. The company’s three founders had worked together at a previous employer. Use the previously mentioned factors to choose which end of that range makes more sense. But she makes $100,000 a year in a secure job at a large company. A keeper. If a substantial benefits program is in place, someone has to handle the day-to-day administrative details and update the program as the accounting and tax rules change. $276k Is the Median Startup CEO Salary for a Very Successful Company Keep in mind, the median salary of $276k is for the CEO of a company about to go public. While it’s easy to understand cash salary, the equity portion can be difficult to assess, particularly for someone new to tech or startups. An executive compensation plan must act as an incentive and retention device for startup executives while delivering a fair return to investors and shareholders who have funded the company. You’ve decided to start a company. Whatever the format, our top priority is … Then they agreed on a formula by which these employees could trade cash for stock during their first three years. The choice of whether to issue actual or phantom shares should also be consistent with the company’s strategy. 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