Expensive CEOs at Venture-backed Companies

I had an interesting conversation with the CEO of a venture-backed company recently where he “explained” why CEOs of such firms need to be paid more now than an inflation-adjusted increase from, say, five years ago. He argued that in the absence of public market exits that the risk/return tradeoff for being a CEO at a venture-backed firm is no longer what it once was. Put differently, cash (in salary) is king, and anyone who relies on options is a chump in the face of the risk of running a startup staying constant, or even increasing.

I don’t entirely disageee, but to the extent that the comp for venture-backed CEOs skews in any significant way toward cash it augurs ill for creating and financing cost-effective startups. But data today does corroborate his point, with the following having been released by VentureSource:

…the CEOs of [startup] companies earn about $10,000 more a year than they did in 2004, and about $35,000 more than in 2003. Overall, the CEOs are earning $260,000 in total salary, bonus and commission compensation, based on an annualized median.

Related posts:

  1. Saying “No Mas” to Star CEOs
  2. Sales 101 for Venture Capitalists (& their Investees)
  3. Being a Company Founder is Apparently Overrated
  4. Is Venture Capital Worth It?
  5. Venture capital continues the slide

Comments

  1. So let me get this straight: the CEO of the *venture backed* startup is saying the chances of a good exit are low.
    Hmm. Isn’t the point of venture investment getting a good return? Is this really the right CEO to maximize returns for the investors and employees?

  2. Nigel deGruyther says:

    No, the point is that the chance for a good exit _for_the_CEO_ is lower, and the CEO must be compensated for this change in risk profile. It says nothing about the potential for an investment exit.

  3. Nigel, good point. However, why is the probability of a good exit for the CEO different from the probability of a good exit for the investors or employees? Isn’t this a question of aligning interests properly?

  4. Adam says:

    I’m curious, did the CEO agree to take a smaller chunk of equity as he argued it wasn’t worth as much, and needed to be replaced with cash?

  5. Typically, employees (especially founders and senior managers) have restrictions on their stock and options that force them to stay invested for a longer period of time, while pure investors can cash out at any time.
    What I find interesting is the double standard: CEOs demand more cash because they will be illiquid, while paying less cash to those they hire.

  6. just.a.guy says:

    experienced, quality startup CEOs are a rare commodity and they know it. their alternatives are often to go work as GMs within BigCorp.
    startup risk is inherently higher even with said good ceo, and if undertaking that risk doesn’t yield superior rewards, good startup CEOs won’t take the job.
    it isn’t about whether the CEO thinks his startup can be successful. it’s whether he thinks that in an ideal scenario he’ll be compensated for the systemic risk, vs. just going back to BigCorp.