Driving performance
The best leadership drives the best performance.
In 2017, Lionel Messi signed the largest sports contract in history — a four-year agreement valued at $673,919,105 with FC Barcelona. It averaged out to $3.7M per game, but the size of the contract reflected something more. It reflected the leadership that the organization expected Messi to provide, from team chemistry all the way through to team marketing and revenue. This year, Messi signed a new contract, with a new team — now including team equity and a cut of the revenue from streaming and merchandise.
When tech firms seek new leaders, they must consider the broad range of impacts that a leader can and should have. Then, they need to align the factors in their executive compensation so that it strikes a delicate balance between attracting the best leaders and achieving the best returns.
“Technology companies need to offer a pay mix reinforcing the business life cycle, with measures that align to drive long-term performance and pay objectives aligned to business objectives,” said Bob Lemke, Grant Thornton Human Capital Services Tax Director.
The pay objectives that are aligned to business objectives will shift as tech companies mature.
The balance for emerging companies
Startups are less inclined to offer substantial cash, because they use working capital to fuel growth, make reinvestments in infrastructure and for other early-stage needs. So, Lemke said, “Their compensation packages can include significant use of equity and long-term incentives, whether it's real or phantom equity, and a relatively modest use of cash.” Since real or phantom equity ties a leader’s total compensation to performance that drives shareholder value, these reward elements align interests and motivate leaders to drive exceptional performance across their teams and persistent dedication and tenacity.
Our latest Russell 2000 data indicates that companies in the information technology sector place a higher-than-average emphasis on long-term incentives, as compared to salary. In information technology, emerging companies offered incentives that were 439% of an executive’s salary, with midsize companies at 424% and stable companies at 234%.
Long-term incentive-weighted compensation works when emerging companies and executives share a belief that today’s work will yield big results in the future. Lemke said that many emerging companies need executives who are “creative risk takers” with fresh ideas, singular experience and unique perspectives. These individuals can readily see how their contributions directly affect the performance of the company — and that should impact their compensation. At the same time, emerging leaders can see challenges when setting specific milestones or performance metrics, particularly given uncertain capital markets and other factors that constrain growth. So, companies need to be careful in where and how much they depend on formula-driven performance-incentives.
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The balance for midsize companies
When emerging companies move to the midsize growth stage, they need compensation that attracts the skills aligned with their current state and future path.
“There's typically more process structure and maturity necessary in the growth stage, especially if your path is destined for IPO,” Lemke said. Now, the company might need to move beyond recruiting risk-takers to experienced managerial executives who pursue targeted growth and more robust business development and sales enablement capabilities.
As midsize companies rebalance their executive compensation, and consider an IPO, they now need to factor in the influence of a broader and more diverse slate of investors.
Investors have a strong interest in the people on the executive team. Shareholders realize that the executive compensation packages can draw from the returns on their investments, so they will want to know details about the compensation strategy. “Stock-based compensation expense, burn rate, utilization of shares and the concentrated positions in the hands of a few can create a lot of barriers to an outside investor,” Lemke said.
That’s when executive compensation needs to balance alignment with the objectives of the company, the candidate and also the shareholders.
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The clear need for transparency
As organizations mature, so does the range of factors to consider in executive compensation. Beyond business performance, many tech companies design compensation to help drive their environmental, social and governance (ESG) and diversity, equity and inclusion (DE&I) goals. ESG and DE&I goals can help recruit and reward like-minded executive talent, investors and other stakeholders. However, when companies add these and other goals to the compensation equation, they can struggle to maintain the right balance over time.
To successfully balance the complex factors in executive compensation, it’s best to start with transparency.
“Transparency usually requires some simplicity and structure that's easily communicated and understood,” said Lemke. Investors will seek clear and concise information about executive compensation components, just like the details they want about strategic objectives, cash flow and profit margins. For executive compensation, they might ask:
- What is the mix of short-term offers, like cash, and long-term components like equity?
- Are the potential benefits fixed or variable?
- Are incentives achieved by a defined group, or unique to an individual?
When tech companies make the compensation mix and metrics transparent, all parties can see how the compensation aligns with objectives. This can drive consensus and even help to attract the best candidates.
Transparency, structure and performance are important themes in finding a balance of executive compensation that satisfies the company, the candidate and the investors. However, these themes are not enough on their own. Innovative tech firms need to show ingenuity in the way that they recruit and motivate the best executive talent while staying true to their integrity and goals.
“There's a lot of creativity that goes into planning and monetizing the value that's being acquired by a tech company executive, in a thoughtful and responsible way,” Lemke said.
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