They decided to forgo cash compensation altogether for the first year. You should resist these temptations. Without an entrenched personnel bureaucracy and long-standing compensation policies, it is easier to tailor salaries and benefits to individual needs. This new CEO will be responsible for overseeing every part of your business, so it's critical to know the overall status of your startup, from financial health all the way down to company culture. Self-insuring smaller claims also conserves cash. First, be realistic about the limitations. Certainly, Thai food is no substitute for a generous pension. After working with startups for over a decade, I have dealt with many founders who are presented with the tough decision of handing off the role of CEO to an outsider. The founders devised a solution to meet the needs of the company and its prospective employees. Startups often prefer ISOs since they give executives a timing advantage with respect to taxes. If not, does it make sense to reward executives based on the companyâs appreciating share value or to devise formulas based on different criteria? This program allowed for maximum flexibility. Executives with excess cash could exercise all their options right away; executives with less cash, or who wanted to wait for signs of the companyâs progress, could wait months or years to exercise. Let’s go straight to the bottom line, and then backtrack to the thinking. Yet their talents were essential if the company were to deliver the software on time. Many young companies underestimate the money and time it takes just to administer benefit programs, let alone fund them. Tax laws impose stiff technical requirements on how much stock can be subject to options, the maximum exercise period, who can receive options, and how long stock must be held before it can be sold. Executives pay no taxes on any capital gains until they sell or exchange the stock, and then only if they realize a profit over the exercise price. Equity establishes a commitment from the CEO through personal stake-holding, but there’s another significant factor that makes it a substantial component: potential return. Youâve decided to start a company. Copyright © 2020 Harvard Business School Publishing. One of the toughest questions a startup founder can ask themselves is, "Should I hire a CEO?" ISOs have other drawbacks. Typically, equity — a percentage of ownership in the company — is the anchor of a solid compensation package for a potential chief executive, so let's dive a little deeper into the details of what this may look like. Harvard Business Publishing is an affiliate of Harvard Business School. Certain approaches, like setting aside assets to secure deferred compensation liabilities, require that executives declare the income immediately and the company deduct it as a current expense. At the same time, there are real advantages to being small. If a substantial benefits program is in place, someone has to handle the day-to-day administrative details and update the program as the accounting and tax rules change. (This program allows employees to contribute pretax dollars into a savings fund that also grows tax-free. The obvious solution: supplement cash compensation with stock. Most companies on their way to an initial public offering or a sellout to a larger company must register particular earning patterns. Letâs consider these questions one at a time. Is It Time To Change Director Board Compensation In Private Real Estate Firms? As with phantom shares and SARs, book-value plans require a thorough accounting review. Questions about an article? 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