Founder Salaries – Transparency is Key
I read an interesting article the other day on The Next Web about a recent trend in startup founders’ salaries. Namely, that they are much lower than many people believe.
“While the image of the startup founder as a champagne-quaffing, private-jet-hiring spendaholic may still remain for some who remember the days of the first dotcom bubble, it’s a thing of the past for most…”
– Martin Bryant, The Next Web
Average Founder Salaries
The study, by data and analytics company Compass, found that more than half of CEOs in the Valley pay themselves less than $50,000 a year. Which is pretty low. This has lead many people to speculate that a low CEO salary is a predictor of startup success. The theory is that the CEO’s success should be as closely tied with the success of the company. The more of their compensation is related to company success the harder they’ll work right?
“The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.”
– Peter Thiel, co-founder PayPal
To an extent this is true. I do think it’s important for founders to have a significant stake in the success of their company. There is a danger however to pegging a hard figure, especially such a low one, to founder salaries.
True Cost of Living
The majority of start-ups are headquartered in San Francisco, New York, and London which are the 9th, 5th and 1st most expensive cities to live in according to cost of living index Expatistan. And when you’re paying an average of $3,000/month in rent and $215/month just getting to work; $50,000 starts to sound pretty low. Not to mention, startup CEOs aren’t all fresh out of college 22-year-olds anymore. According to a study by LinkedIn, 40% of startup founders are between the age of 30 and 39. At this stage in your life, you’ve likely got a significant other and possibly kids to support, meaning surviving on $50,000 is going to be nearly impossible.
San Francisco – 9th New York – 5th London – 1st
The reality is that choking back your run-rate by not paying yourself is counter productive if you aren’t being pragmatic about it. I think the numbers in this study are wildly misleading and don’t represent a true analysis of how much startup CEOs are worth in salary. Possibly they are heavily skewed by the alternative methods of compensation open to a director such as dividend payments.
Incentives that Make Sense
That said, I believe that the salary of founders or c-level personnel is a key issue. The ratio between the highest paid employee (typically the CEO) and the average pay for the company is, in my mind, a good indicator of the health of company regardless of size. A recent Standard & Poor’s 500 index of companies found that the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20% from 2009.
This is a major concern. I believe that CEO’s, especially founders, should be incentivised by long term compensation vehicles such as shares that vest over a period of 3-5 years. This ensures that the motivation of the executives on the company are aligned. Salary, as I mentioned above needs to be sufficient but not excessive.
Practice What You Preach
A policy we have employed at import·io to ensure transparency around this subject is to make the founders salary public to the rest of the staff. Having every employee aware of our commitment level, ensures that our motivation is clearly on growing the company not spending investor’s money lining our own pockets.