The end of the year is a time when compensation is on a lot of people’s minds—particularly with company committees busy working to set executive salary, bonus, and equity compensation for the coming year. Last week, I gauged Xconomy readers’ thoughts on the subject with a short quiz on tech- and life-sciences-executive compensation. The questions were drawn from the latest CompStudy, a survey of cash and equity compensation for top management at private technology and life sciences companies that is conducted annually by executive search company J. Robert Scott in partnership with Ernst & Young.
Now it is time for the answers, along with some commentary from Aaron Lapat, a managing director of J. Robert Scott, and Michael Greeley, a general partner with Flybridge Capital Partners and chairman of the New England Venture Capital Association. Both helped me choose the questions in the first place.
First, some high-level perspective from Greeley. “There was kind of a cascade over the past year of plans being reset,” he says. That means targets established a year ago are almost “completely irrelevant today,” making it extremely hard to determine whether an executive did well or poorly in 2009. Greeley says the focus of compensation discussions has shifted from being very quantitative (based on achieving or missing financial targets) to looking more at a person’s relative contributions to the company and whether he or she did a good job in a tough environment—as well as what it will take to keep good people motivated for the coming year. “The discussions, I think, have become much more difficult,” he says.
It is pretty safe to say, though, that with companies still in cash preservation mode, cash bonuses will be down significantly this year, Greeley says. That has led some companies to hold out hopes of bigger-than-normal bonuses in 2010, so that their execs have a chance of making up some ground. Greeley acknowledges, however, that this might not be possible for many companies, because the general outlook is still for slow growth or no growth.
One big frustration for Greeley as an investor and director is that people being recruited for senior executive positions are putting a lot less value on equity. Traditionally, he says, when people are being recruited from a big company to a startup, they don’t look to match their cash salary and instead figure they will come out far ahead in the long run thanks to the equity component. In this environment, he says, the attitude is often: “Hey I need basically what I was getting at the big company if you want me to join your early-stage company and I want the equity.”
Greeley calls that “disappointing,” and says it arises from the general lack of liquidity in markets today. In the past, recruits always knew people who had made a killing in a startup, “and that hasn’t been the case in a while.”
So, if that isn’t enough to make you nervous about your own year-end bonus and next year’s package, here are the answers to last week’s quiz, along with commentary from Greeley and Lapat.
1) Across both life sciences and technology companies, which founder position, other than CEO, gets the most equity?
Correct answer: COO
Commentary: Both Lapat and Greeley were surprised by this answer. “Intuitively I would answer that question with CTO,” says Lapat. And in fact, he points out, some 70 percent of respondents in the compensation survey came from companies with less than $5 million in annual revenue—companies so small they don’t typically even need a COO. So why are COOs on average so well compensated? Lapat and Greeley say the numbers could reflect a number of instances when a founder/CEO has been replaced and given the COO title instead.
2) Which technology management position [other than CEO] has the highest compensation package (bonus and salary)?
Correct Answer: Sales
Commentary: Our readers’ top choice was CTO. But, say our commentators, it isn’t surprising that the top sales executive would do even better, because sales is all about driving revenue growth, with bonuses pegged to hitting revenue goals. What struck Lapat as surprising was that when it came to equity for non-founders (a subject I didn’t cover in the quiz), CTOs and sales execs were in a virtual dead heat. “The sales exec has always had more cash,” says Lapat. “But in previous years we’ve seen CTOs with more equity—not twice as much, but a modest step up. So maybe there’s a higher value being placed on revenue generation.” In any case, he says, “It used to be the CTO was the crown jewel. But now it seems there are two crown jewels. The generator of the technology as well as the generator of the revenue.”
Greeley adds that companies this year were focused even more than usual on rewarding top-line revenue growth. “What I observe on my boards is sales guys got these super commissions structures this year as a way to really drive revenue generation. CEOs and boards probably paid a higher premium for revenue in this environment”
2a) Which life sciences management position [other than CEO] has the highest compensation package (bonus and salary)?
Correct Answer: COO
Commentary: Lapat is sticking to his view that the COO just is not needed by most small companies, and says he can’t fully explain the result. “It’s just weird,” he says. Greeley is also surprised. “None of my companies have COOs, so I would have thought it was the CTO.” He guesses that the answer either means that founders were moved to the COO role, or that somehow a premium was paid for people who could make the trains run on time and bring products out.
3) What percentage of technology CEOs have severance packages?
Correct Answer: 58 percent.
Commentary: See question 3a below.
3a) What percentage of life sciences CEOs have severance packages?
Correct Answer: 71 percent
Commentary: “I’m surprised they were as low as they were,” says Greeley. “I don’t think I have any companies where there is not some severance provisions for CEOs.” Founder CEOs are less likely to have severance because they have so much equity, he says. “But for any hired gun CEO, that’s just part of the discussion now.”
“This is always interesting when I show the data to the VCs, because they seem to think all their CEOs have severance packages,” says Lapat. “For the VCs, they don’t like to negotiate severance packages, and all it takes is one or two and it feels like they’ve negotiated with everybody.” He adds, though, that in tech companies the percentage of CEOs with severance packages has historically been around 60 percent. “It’s not like this year is an anomaly.”
But let’s look at life sciences. Not only are life sciences CEOs more likely to have severance packages, they get better packages—an average of 9.2 months’ salary versus 6.8 months’ for tech CEOs, says Lapat. “It says to me that there’s a lot more uncertainly in life sciences,” he says. “In large measure, biotech is hit it big or bust. There is less opportunity for doubles and triples than in tech. In tech, there are plenty of doubles.”
Greeley adds that CEO skills in tech are highly transferrable between fields like software and financial services. Life sciences CEOs are more specialized, and there are fewer jobs—so they need a more generous severance package.
4) What technology management position is least likely to have a severance package?
Correct Answer: CTO
Commentary: Lapat theorizes that CTOs at tech companies might be focusing on getting better equity packages, rather than severance. It could also be that they are less likely to focus on negotiating a severance package because there is a perception of more stability in that position, he says. Similarly, there could be a relative over-supply of technical talent on the market that curtailed their negotiating leverage. Then again, he says, it could be that “they’re the poorest at negotiating for themselves.” (Founders, who are much less likely to have severance packages than non-founders, are excluded from the severance data, so the fact that many CTOs might be founders of tech companies would not have affected these results.)
4a) What life sciences management position is least likely to have a severance package?
Correct Answer: Head of Sales
Commentary: This is the only question our audience got right. Greeley, who expected the same answer in for tech companies, says that sales skills are highly transferrable, so the need for a severance package is lower.