Startup Compensation

The second problem common with start ups is the seriously high pay the directors and senior managers get. One CEO (if you can call a guy in charge of 30 people a CEO) was getting paid £250 per annum. Apparently he was very good at what he did. Unfortunately it wasn’t running start-ups or small companies. Likewise the CFO and COO (who were part of those 30 people) were also on fantastic salaries.

After I had turned it around I commented to the main investor that they got paid way more than me – AND I MADE HIM MONEY!!

How was I meant to interpret this? I got a dirty look, not because I was wrong, but because I was right.

The point is, paying big money does not guarantee you a good senior manager, nor does it get you a good person; and even if you do get good people – they may not have small business skills. Remember this place only had 30 people, so a £150K CEO would probably have even been over the top; and even if it wasn’t, I am sure a £100k CEO would have done just fine.

Think of it this way.

You pay a CEO £250K per year for 4 years – that’s £1million out of your investment gone. And what have you got in return? NOTHING!

Worse, if you had spent £100K for a CEO then rather than getting 4 years of work, you would have gotten 10. Naturally if you were paying £250K for a CEO you would probably be looking at a successful company with good profits, with more than a few staff (depending on the industry) and revenues in the tens of millions.

If that point isn’t painful enough also remember to include the CFO and COO as well. After their 4 years of delivering no profits, I worked out that the firm could have cut 10-15% of their staff costs, just by getting rid of them. As a result of these large salaries, the primary investors have lost allot of money at the very time when it is most precious – at the start.

Naturally the investor wasn't happy and neither was I; my pay was less than half of the CFO. And if that didn't leave a bad taste in my mouth, they all went on to bigger and better positions; all very disillusioning.

The only good points of this sad tale is that if you want to sort out your compensation issues here are a few tips.

1. Change to a bonus system where the bonus paid reflects your risk as an investor. That is the companies start up risk. This bonus should be as big as possible - I try and push for 40-60% - but go higher if you can. Remember most firms make little attempt to use their compensation systems to over come the temptation of senior managers to shirk. After all, who cares of you lose 5% when you're pulling in £2000+ per week. But you will care when 40-60% is on the line.
2. Conversely make the salary part as small as possible. At this point, your senior managers will begin to jump ship – because they know gravy train is now over, and you are demanding results
3. Hire new senior managers – if they accept the large bonus and small salary – then those are people who in all probability can deliver to you those results
4. When you are about to hire them – hand them a resignation letter for them to sign but leave it undated. Again if they sign this – these are the type of people who will fully understand why you are doing this – so you can hold them to account. Put it in a safe place and never ever bring it up unless you have to use it