By Corey Ferengul
One of the most common questions I hear from new CEOs is, “How does CEO compensation work?” It’s a tricky subject, with a lot of variables, and it varies widely depending on the size and stage of the company. Whether you're stepping into the CEO role for the first time or just curious about what to expect, understanding how compensation is structured is key to negotiating your package and aligning incentives with your company's success.
In this article, I'll break down the main components of CEO pay, share insights from my own experience, and discuss a few points that my co-host Mike Shannon and I covered in our conversation on this topic.
1. Salary vs. Bonus
The first and most obvious component of CEO pay is cash compensation, which typically consists of a base salary and a performance-based bonus. Many new CEOs are surprised to learn that they often aren’t the highest-paid employee in the company. In fact, sales leaders or top salespeople may earn more in cash compensation.
As I mentioned on the podcast, “You might not be the highest-paid person in cash terms, especially in companies doing $50M to $100M in revenue”. Here’s how the cash side of CEO compensation typically breaks down:
Base salary: Often set lower than the top salespeople or key revenue-driving roles.
Bonus: Usually tied to key performance metrics, such as EBITDA or revenue growth, with a typical split of 50-50 between base salary and bonus. Sometimes, it’s 60-40, but the bonus is always tied to the company’s performance.
2. The Role of Equity
One of the most important components of CEO compensation, especially in startups or growth-stage companies, is equity. This offers CEOs the chance to directly benefit from the long-term growth of the company. When you’re brought in as a CEO from the outside, you can expect around 5% equity in an early-stage company (under $50M in revenue).
Mike shared a key insight about equity during our discussion: “That 5% equity doesn’t mean you’re walking into a $5 million payday. It’s tied to the value of the company when you join and the growth you help generate”. Your equity package typically includes:
Vesting: Equity is usually spread out over four years, meaning you earn it over time, not all at once.
Strike price: This is the value of the company when you join. You only gain financially if the company’s value increases from this point onward.
Equity gives CEOs a powerful incentive to align their financial success with the company’s growth.
3. Balancing Short-Term and Long-Term Incentives
CEO compensation isn’t just about immediate rewards. Equity helps ensure CEOs are focused on long-term growth, but there are other mechanisms in place to incentivize long-term thinking. One common practice is the inclusion of acceleration clauses in case the company is sold.
These clauses often include a “double trigger”, meaning that if the company is sold and the CEO is let go, the remaining unvested shares would vest immediately. This ensures that the CEO is fairly compensated during transitions or acquisitions.
4. Skin in the Game: What It Means for CEOs
One of the most important aspects of CEO compensation is that it often requires the CEO to embrace delayed gratification. As Mike shared during the episode, “As a founder, all I knew was equity compensation—no salary, all upside”. While most CEOs will receive a salary, many private equity-backed companies also require the CEO to invest in the company to further align incentives.
This is the key takeaway for any CEO: your financial success is tied to the long-term success of the company. It’s not just about what you earn this year; it’s about the value you help create over the next several years.
Final Thoughts
CEO compensation can seem complex, but it’s all about aligning incentives. The base salary and bonus provide immediate cash flow, but the real upside comes from equity and long-term growth. Whether you’re negotiating your first CEO role or reassessing your current compensation, remember that the best packages offer a balance of cash and equity, tied to your performance and the company’s success.
-Corey Ferengul
Co-Host of Opening the C-Suite
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