Tag Archives: Owner

What is Appropriate Compensation for a Founder CEO? Four Points

Situation: A founder CEO established her company with a significant personal loan, which is being repaid. To compensate herself for the original investment, she is considering several options including an employee stock option plan (ESOP) through which employees would be able to establish ownership of a certain percent of the company. What is appropriate compensation for a founder CEO?

Advice from the CEOs:

  • The critical question is: what is the CEO’s goal? The next question is – what options best serve to achieve goal?
    • If the goal is long-term goal is maintaining or increasing current income combined with long-term security – like a Trust Fund – seek the counsel of a financial advisor who can help model how the options under consideration will satisfy the goal.
    • This individual can also evaluate the tax advantages associated with various options.
  • Is there a clear exit strategy in place?
    • Every company needs a written exit strategy, as well as a plan to put this strategy into action.
    • The simple existence of a strategy and a plan does not preclude adjusting either the strategy or the plan as conditions or opportunities change.
  • There are two important corollary points:
    • Having a strategy and plan is the only way to build a structure of accountability within the company; and
    • Recalling a lesson from Jim Collins’s book, Good to Great, the successful companies selected a solid strategy and stuck with it; the less successful comparators continually changed strategy and never allowed momentum to build.
  • To assist establishing an exit strategy, seek the advice of one or two consultants. There are several highly qualified exit advisors that can be researched through current professional contacts or via the Internet.

How Do You Set End of Year Owners’ Comp? Three Thoughts

Situation: A company is a C Corp with several owners. As it is the end of the year, there is an active debate on owners’ compensation. The CEO has looked at a number of options, but would like the advice of others in a similar situation before making a decision. What do you see as the pros and cons of various options for end of year owners’ compensation?

Advice from the CEOs:

  • In one company, profits are split among owners according to stock ownership. This is similar to a public corporation where dividends accrue according to stock ownership. The pro is that it is equitable; the con is that smaller owners who may have made significant contributions during the year don’t necessarily receive the recognition that they may believe they deserve.
  • Another CEO varies owners’ compensation according to company performance. In good years, there is the option to be generous through enhanced bonuses, etc. In slim years it is more important to conserve cash, and quite frankly company performance didn’t justify significant bonuses. The pro is that this offers the CEO more flexibility than the first option to recognize significant contributions; the con is that the recognition of some may seem arbitrary to others.
    • In response to the latter observation, a third CEO sees this as acting like a good father – sometimes you just have to declare your prerogative if employees squabble about your decisions or push too hard for unreasonable requests.
  • The CEO who originally asked the question followed with an additional question – how do you present your compensation decisions to owners or staff who may think that they deserve more than their stock position or company performance over the year allows?
    • This is a facts of life situation – once the final determination is made it is not negotiable.