Most of the decisions taken by entrepreneurs are purely by the gut feeling. This is basically because most of the times there is lack of accurate data, sometimes there is data but not great access to it and most of the times it’s a lot of what we call “Rule of the Thumb”. So over the course of time you tend to trust your gut feeling the most. But what when it comes to salary. You do need data when deciding on the pay for your employees, right?
I came across an article covering myths about start-up pay by Noam Wasserman and Furqan Nazeeri of the Harvard Business School and thought of sharing it here.
Myth number 1. Startup CEOs make a lot more than the rest of the executive team.
It is obvious where this idea comes from. Every entrepreneur wants to be Bill gates, or for more recent times, Mark Zuckerberg. All the Fortune 500 CEOs we see today make several times more money than their immediate lower-level executives.
Compared to the lowest paid member of the executive team, the non-founding start-up CEOs make only 1.7 times more compensation in terms of cash. The difference comes in Equity where they end up getting almost 6.2 times more than the lowest paid executive member.
Myth number 2. Founders make more than everyone else.
Founders often believe that their own pay is like a ceiling while determining pay for others. They try to structure the pay such that it always stays more than what others get.
Across all senior-executive positions, founders make significantly less than other similarly-qualified execs. I call this the “founder discount.” This holds true even when we adjust for differences in the amount of experience these executives have and, importantly, their equity stakes. Founders refer to their start-ups as their “baby” and are willing to give up some personal comfort to fund their baby’s development. They soon learn that the rest of the management team doesn’t feel the same way, and often lose their best hires when they refuse to pay market rates.
We recently came cross an article which fits in here perfectly. If you haven’t read it yet, catch it here. (My First 90 Days in a Start-up)
In this data, 283 tech companies were profiled in which the founder was still the CEO. Only 17% of those founder-CEOs were the highest-paid member of the executive team. In another 24% of the companies, someone else on the executive team made as much. In a full 59% of start-ups, the founder-CEO was out-earned by at least one of his or her subordinates.
Myth number 3. Vesting is a tailored way to keep execs on board.
Vesting, which requires executives to earn their equity through continuing involvement in their companies, is effective at “handcuffing” the executives to the company until their contribution is less crucial.
Almost 15000 non-founding executives have been included in this sample of which a stunning 77% had four years of vesting. Four years may be a good amount of time for some start-ups and executives, but blindly applying that rule of thumb so broadly doesn’t make sense. Vesting terms should be tailored to the unique needs of the start-up, the time during which the executive is expected to play a key role, and the start-up stage of development. Yet four years remains the standard.
Do these Myths stand in the start-up scene in India as well? Are these actually myths or does your start-up tell something else? Do share.
(Dr. Noam Wasserman is a professor at Harvard Business School. He is known for his book, The Founder’s Dilemmas)