Setting a data-informed executive compensation policy for startups
Managing executive compensation as your startup grows to series A and beyond
Setting seed-stage compensation for your founding team is generally straightforward. Most early-stage startups in a particular industry and geography use fairly standard models for base salary, equity stake, and (possibly) variable compensation.
If you are successful with your seed funding, and your startup grows in size in value, your executive compensation structure will probably become more complicated as you proceed to series A funding and beyond. You and your leadership team will reasonably expect regular compensation adjustments on an annual basis and/or based on specific growth milestones.
As the CEO, you are likely responsible for obtaining board approval for all increases and changes in your executive team’s compensation. At Pracademic Coaching, we work with numerous CEOs and founders in our executive coaching practice. And they generally agree – it’s an undesirable task to make the case for comp increases, especially for yourself. (Your board members probably prefer other conversation topics, as well.)
For these reasons, Pracademic Coaching recommends applying our unique approach of “think ahead to act now” to executive compensation management. This post explores why and how to establish a compensation policy based on objective, industry-benchmark data that can be put into action now, and will automatically scale executive compensation as your startup grows in the future. This includes:
The problems with ad hoc management of executive compensation
The benefits of establishing an objective, data-informed compensation policy
The approach to designing and implementing an executive compensation policy
The problems with ad hoc management of executive compensation in startups
Standardized starting points for founder compensation become less useful
At the seed stage, startup founder compensation is somewhat standardized. It’s fairly easy to find compensation ranges (base salary and equity) for key roles in early-stage startup organizations.
You might use resources such as wellfound’s Startup Salaries and Equities tool, Kruze Consulting’s Average Startup Founder Salaries guide, and Cake Equity’s guide to Startup equity split. Michael Seibel of Y Combinator explains in this excellent video How to split equity among co-founders. (Hint: it’s equally.)
The venture capital firm that leads your seed round may also provide compensation guidance.
A tech company with a three-person founding team including Chief Executive Officer (CEO), Chief Technology Officer (CTO), and Chief Marketing Officer (CMO) might have a compensation model as follows at the seed stage, using New York and San Francisco as sample locations, in 2023:
| Role | Base salary (NY) | Base salary (SF) | Seed equity stake |
|---|---|---|---|
| CEO | $110K-$140K | $120K-$150K | 20% |
| CTO | $120K-$150K | $130K-$160K | 20% |
| CMO | $110K-$140K | $120K-$150K | 20% |
Ranges account for each individual executive’s level of experience, the amount of funding the company has raised, valuation, etc. However, the ranges are fairly narrow.
As the company grows, these standardized starting points become less useful. The same tools and sources might help inform compensation as the company grows, however fair compensation will become less standardized as other factors broaden, (e.g., roles and responsibilities evolve, key hires are added, etc.)
The difficult task of asking for money from the board
When it’s time to update your executive team’s compensation, one of the primary challenges is that executive compensation typically requires approval from the board. It’s typically the CEO’s job to make the case.
It’s time-consuming to make well justified recommendations on compensation packages that consider executive performance, and align with the company's current financial state, growth, and industry benchmarks. Factors both within and beyond your control may influence whether board members are amenable at any given time to consider compensation adjustments.
This process can be daunting simply because it involves asking for money, and even more so when asking for adjustments to your own compensation.
Scaling compensation with growth requires frequent changes
Startups are known for their (hopefully) rapid growth and evolving valuations. As your company progresses, roles and responsibilities change, and so should executive compensation. As noted, if your company is growing, you and your leadership team will reasonably expect regular compensation adjustments on an annual basis and/or based on specific growth milestones.
This will likely entail adjustments to base salary, as well as additional grants of options. Equity must be monitored as the cap table and business valuation changes.
Adjusting your executive compensation packages is extremely important as the business scales in terms of both talent retention and your startup's ability to attract qualified new leaders.
This means the need to request compensation adjustments may arise fairly frequently.
The benefits of establishing an objective, data-informed compensation policy
At Pracademic Coaching, we believe strongly in eliminating reactive or one-off decisions, and instead employing objective, repeatable systems informed by data. Executive compensation is a perfect opportunity to do so.
The benefits of creating such a policy include:
Scalability as your executive roles and compensation needs become less standardized.
Reducing/eliminating the need to make ad hoc requests to the board for executive compensation adjustments.
Establishing automatic intervals and triggers for executive compensation review.
Demonstrating forward-thinking leadership and data-driven decision-making to the board.
The importance of this last point cannot be overstated. Founders, and especially first-time founders, must take every opportunity to earn credibility with their board members. This will pay dividends in times when your startup inevitably faces difficult challenges, as your board and investors will have greater trust in your decision-making skills.
The approach to designing and implementing an executive compensation policy
Pracademic Coaching’s unique approach enlists the power of thinking ahead to enable our clients to act with conviction now. We encourage and collaborate with our clients to proactively design and implement data-informed, automatically triggered compensation policies that plan for future growth and can be enacted now.
1. Identify objective sources of compensation data
Eliminate the perception of subjectivity by using credible third-party data to inform your compensation packages. The CEO and board members should agree in advance on the source(s) of compensation data.
Depending on the complexity of your particular business, and how much specialized expertise is required by your leadership team, you might choose from a range of sources.
For businesses with lower complexity, the generalized tools mentioned previously — wellfound’s Startup Salaries and Equities tool or Kruze Consulting’s Average Startup Founder Salaries guide — might be appropriate data sources for salary data. Cake Equity’s guide to Startup equity split provides equity guidelines at various stages of growth.
For businesses with medium complexity, you might choose a paid compensation intelligence platform like OpenComp or CompAnalyst from Salary.com.
For businesses with high complexity and specialization, you might hire a compensation consulting firm. While this is a more expensive approach, your business may benefit from working with consultants with expertise in your particular industry or technology.
The cost of each option increases from free to rather expensive. The specifics of your particular business should determine the right level of investment for your startup.
2. Set targets for overall comp and salary/equity mix
Total compensation packages for startup executives and founders are based on a mix of base salary and equity, plus benefits. (There may be other elements, as well, such as performance-based bonuses and profit-sharing.)
It’s helpful to establish a target percentile for total compensation relative to industry benchmarks, as well the percentage mix of salary and equity.
The mix may be implemented as a rule, or as a suggestion to accommodate preferences of specific key employees. A CEO might choose heavier weighting of equity relative to base salary. A more risk-averse leader might choose a higher base salary and less equity.
3. Consider roles covered by the policy
This post deals specifically with designing an executive compensation policy, rather than a policy covering all employees. An executive comp policy should consider founders, as well as new executives that might be added as the business grows.
In particular, equity will be substantially different for founders versus executives who join at later stages. In addition, where contributions among co-founders are often fairly evenly shared and valued in early stages, responsibilities become diversified as the business grows, creating the need for role-specific benchmarking.
4. Specify time intervals and triggers
This is one of the most important steps. It’s the key to ensuring your board will consider executive compensation changes, without the undesirable task of asking them to do so on an ad hoc basis.
Most companies set annual review periods for evaluating compensation. In addition, the dynamic nature of startups might also dictate additional triggers. For example, a new valuation event, fundraising round, or reaching specific milestones of growth.
Defining these triggers requires thinking ahead by a number of years, with a clear vision of your startup's path to success. Anticipating these triggers and including them in the policy is the key to ensuring automatic compensation reviews as your company grows.
5. Implement and learn, iterate to improve
As with any development methodology, the final step is to implement your policy and learn from the data it generates. The goal of the policy is to ensure fair, data-informed executive compensation that scales with the growth of the business.
Evaluating the success of the policy is key, by asking a questions such as:
Do the founders and executives feel their compensation is fair?
Are board members satisfied with the process of evaluating compensation based on the established intervals and triggers?
Are the selected data sources and benchmarks still the best ones for this particular business at this stage of growth?
What works well about the policy, and what needs to be improved?
Policies are not meant to be set in stone. They are meant to be guidelines to inform action. If they are not working well, or if new opportunities arise, iterate to improve.
Start working with our executive coaching practice today
At Pracademic Coaching, our executive coaching practice specializes in helping CEOs, founders, and leadership teams navigate complex challenges and achieve peak performance. Our unique blend of practical and theoretical knowledge can empower you to make informed decisions that drive your startup's success.
Start thinking ahead and acting now to achieve your goals. Contact us today to set up a free coaching consultation.
