Reasonable CEO compensation structure
December 07, 2021
by a searcher in Toronto, ON, Canada
I have been approached to take over as CEO for a manufacturing business that is in a turnaround situation. The current owners took over the business a couple of years ago after injecting significant cash into the business and bailing out the previous owner from a default situation.
Their offer for me to take over as CEO includes a salary that is below market; the main incentive comes from equity upside of up to 20% depending on the turnaround progress. I will not have the opportunity to get to know the business intimately or do any kind of due diligence. From what they have told me, the turnaround is on track.
I want some opinions on a reasonable and fair compensation structure in this scenario and any pitfalls to look out for. For what it's worth, I have a previous relationship with the current owners and believe I can trust them.
from Massachusetts Institute of Technology in Colorado Springs, CO, USA
1. Is this a bread-and-butter assignment for you, or a great growth opportunity that will open new doors for future career steps? If the latter, there is some value in that that I would price in.
2. When you say you can't do any due diligence, does that mean you can't even visit the company for a day? Walking through the factory should tell you a lot about whether there are low hanging fruit, or if you can just pick the fruit up off the ground.
3. One pitfall to look for is that any performance-based compensation can't be played with too easily by the owners based on board decisions.
4. Another pitfall is that if it might take more than 5 years to realize any value in the stock options, be mindful that for certain top employees, stock options can last 5 years only, not 10 like usual.
from The University of Michigan in Boulder, CO, USA
But in addition to Karl’s points, you may have already done a simple projection of the company performance and your corresponding compensation. If you haven’t, it’s a great exercise to get some figures to work with and see how you feel. To the first reply above, if it opens doors to something lucrative, you may have to go lower on comp
Be fairly compensated (in dollars and everything else given the situation), be sure you have enough control to be a leader, and make sure it gets you closer to your goals than any other option