Executive compensation plans are essential for VC-backed companies who depend on top leaders to steer them toward growth, funding, and long-term success. A strategy for executive pay is especially important for early-stage companies, which typically have limited revenue, restricted cash, and an abundance of equity that can easily be awarded too fast and too soon.
But often, startups underestimate how complex executive comp is or don’t realize they need a plan separate from the plan for employees. Without a well-designed strategy, poorly designed executive comp plans can lead to hiring and retention problems, internal pay inequity, and low morale for both executives and employees.
To help set your organization up for success, this article — the first in our series on executive compensation — covers why executive comp is more complex than employee comp, its key elements, and what to consider before designing your plan.
What Is Executive Compensation?
For startups, executive comp typically refers to C-level executives, and senior and executive vice presidents. And depending on the company structure and size of the executive suite, it can also cover vice presidents.
The three pay elements that make up executive comp are:
- Base salary: cash
- Bonuses: short-term incentives
- Equity: long-term incentives
While base salary and bonuses are important, when we talk about executive comp at startups, we’re mainly focused on getting equity right. Equity is a percentage of ownership in a company, typically through stocks or shares. Venture-backed companies use equity and its potential for significant payouts to lure — and retain — top leaders when they don’t have a lot of cash to work with.
Why Exec Comp is Riskier Than Employee Comp
Although employees also receive a base salary, equity, and bonuses, executive comp is riskier because it has a greater impact on:
- Runway: Executives often earn a larger base salary than non-execs, especially as a company grows.
- Ownership: Executives typically get more equity and a bigger piece of the pie than employees.
- Growth: A poorly designed comp package could lead to hiring a leader with the wrong level of experience and skills, which can affect overall company growth and success.
Also, executive comp must be approved by the board of directors, which doesn’t review employee pay on an individual basis.
There are a lot of decision-makers who look at executive comp from different lenses so it’s important to have a documented strategy to back up offers.
The Complexities of Designing Executive Compensation Plans
With nonexecutive roles, you have a clearer sense of the market, which is largely driven by industry and geography. Companies target base salaries within a range based on market data for a specific role and job level in a specific location. For example, with so many engineers, it’s easy to learn what tech companies are paying engineers with five years of experience in San Francisco.
For executives, the market is more specific and individualized. The market for CFOs, for example, isn’t very large. You need to consider an individual’s experience, along with your company’s industry, size and stage, and various financial metrics. Rather than dollar amounts, base pay for executives is based on percentiles within a range that considers all these factors.
When you’re crafting an offer for an executive, you’re essentially asking yourself:
- What is the market data telling us this individual could get elsewhere with their background and experience?
- How do I make our offer a good fit for our size and funding stage?
- What’s the mix of cash and equity?
- How do we pitch them on the potential wealth creation opportunity?
The Benefits of a Strategic Executive Compensation Plan
Starting with an executive compensation strategy, rather than a candidate’s expectations, helps you craft a compensation package that works for both sides. This approach increases your chances of hiring and motivating the right leaders, strengthening your company, and fostering long-term success.
Now that you know about the fundamentals of executive compensation, explore the rest of our series to learn more:
Executive Compensation 101: Common Mistakes & Best Practices
Executive Compensation 101: Nailing Equity
Executive Compensation 101: Equity Refresh Grants
The Benefits of an Experienced Compensation Partner
Whether you’re a first-time founder, early-stage finance leader, or seasoned CFO, partnering with an experienced executive compensation consultant boosts your chances of nailing an executive comp strategy that supports your company and attracts the right leaders.
Sequoia’s tech-enabled advisory, unified services, and powerful platform can help VC-backed companies large and small attract and motivate the right leaders while controlling burn and dilution. Connect with a Sequoia consultant today.
