Help Increase Transparency in Private Company Executive Compensation

7/21/10

A decade ago, investors and chief executive officers were largely flying blind when it came to compensation in early-stage, privately held companies. They had little more than anecdotal information and their gut to judge how much it would take to land a new head of sales or whether it was worthwhile to retain a chief financial officer who had a lucrative competing offer. How could they assess two candidates with different salary histories? What was the market for a non-founder CEO at a company with a successful series B compared to one about to raise its series D?

These scenarios and questions were among the many that I and others at J. Robert Scott and Ernst & Young set out to solve in 2000 when we launched CompStudy. A core goal of CompStudy was, and continues to be, the creation of transparency about compensation for private companies. Since 1938, the Securities Exchange Commission has required public companies to provide clear, concise, and understandable disclosure of the type and amount of compensation paid to their five highest paid executives or officers. However, unlike in the public sector, private early-stage companies can keep their data private, but as a result also remain in the dark about their peers. With CompStudy, we keep each company’s own data completely confidential, but enable participating companies to get unbiased, large-scale data about the market for executive compensation.

CompStudy is now the longest-running, most comprehensive survey of equity and cash compensation for top management positions and boards of directors at private American companies in the technology and life sciences industries. Participants who complete the annual survey receive free on-line access to the aggregated data as well as a series of tools to slice compensation for all senior executive positions based on industry sector, geography, founder/non-founder status, number of financing rounds, revenue, and head count. The study also provides detail on board compensation, organizational changes over time, and other compensation trends.

Over the last decade, the CompStudy dataset has served as the backbone of my research on the early choices founders face that have long-term implications for them and their ventures. Those choices include how they build their founding teams, how they hire their executives, and how they raise outside financing. Some of this research has found its way into case studies in my “Founders’ Dilemmas” course at Harvard Business School that this coming year will be the most highly enrolled in HBS’s entrepreneurship program. Some of it has appeared in my research blog. But the bulk of it will see the light of day in my forthcoming book, Founding Dilemmas, which for the first time will marry our CompStudy data with my case studies, research results, and frameworks for thinking about these critical early decisions.

Access to this data can be powerful for all concerned. Recently, a student of mine went to a meeting with the CEO of a high-growth venture to negotiate her compensation package. At the beginning of the meeting, she pulled out the CompStudy metrics for the position she would be filling. “Very interesting data,” the CEO replied. “I have my own compensation metrics,” he continued, and pulled out his own CompStudy data; his venture had been a long-time participant in the CompStudy survey. Armed with objective metrics where before there had been only anecdote, the two sides came to a quick agreement about the components and amounts within the compensation package, enabling them to focus on the actual work itself.

The need for such data will only increase in the coming years as venture investment accelerates its spread beyond the traditional American hubs of entrepreneurship. To keep pace, CompStudy has also launched efforts overseas in the UK, Israel, India, and China. CompStudy also continues to broaden its sector focus, adding cleantech companies whose business models are a hybrid, combining the product focus of technology with the longer timelines of the life sciences. And in the coming years, we will be bringing a wealth of non-compensation knowledge to investors and entrepreneurs.

Raising the bar even higher is why I urge you to participate in this year’s survey. In our first year, barely more than 200 companies participated; this past year, nearly 800 did. Now is the time to do your part. Take the 2010 survey, gain much deeper knowledge into how your compensation packages compare to the broader market, and contribute to bringing more transparency to private-company executive compensation.

We’d love to see a record number of companies participate this year because we are at a turning point. In the risky world of venture capital and entrepreneurship, the more transparent we can make the marketplace for highly skilled leadership, the more decisions about compensation will reflect the ideal that undergirds disclosure in the public markets.

[Note: The deadline for taking part in the survey is July 31, at www.compstudy.com.]

Noam Wasserman is a professor at Harvard Business School. Follow @

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  • http://www.altgate.com/ FN

    As a long time participant and observer of CompStudy, I have found the study to be hugely valuable in bringing transparency to an otherwise arcane, murky topic. And with greater transparency comes greater liquidity which brings more talent to entrepreneurship…something everyone can agree is a great thing.

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