Equity Compensation - How Much Equity Does a CEO Get?

When it comes to equity compensation packages for executive hires, how you pay becomes more important than how much you pay. This is especially true for CEOs, whose focus and results directly affect the company.

CEOs are responsible for running a company's overall operations, and their leadership and performance can easily make or break a company. Hence, many companies hope to align the CEO's interests with stakeholders by offering competitive CEO salaries and equity compensation packages.

Importance of Equity Compensation for CEOs

Delivering competitive salary and equity compensation is a crucial business strategy that aligns an employee's interests with the company. At the same time, it helps the company attract key hires and motivate long-term executives without the liquidity to pay them a significant amount in cash compensation.

Most companies offer equity compensation or some type of share-based pay element to CEOs, co-founders, board members, and other executive members to incentivize high performance.

When these employees have company stock as part of their competitive salary compensation, it is in their best interest to drive company growth to gain better returns. These tools also help align executives with the goals and expectations of shareholders.

How Much Equity Does a CEO Get?

Compensation is an art form in the HR world. There is no hard and fast rule when it comes to how much equity or the kind of equity a company offers a CEO. However, there are basic guidelines based on past industry practices.

Regarding the share size, pre-IPO companies that hire CEOs externally typically offer 5% to 12% of the company's fully diluted outstanding shares, while Founder CEOs holdings depend on the value and number of funding rounds and can range from 15% to 75% or more of the company.

The range of company ownership for founder-turned-CEOs is significant as the figure depends highly on the number of stakeholders, who offers the most value to the start-up, and what stage the start-up is in.

A CEO who brings the most value to the start-up typically holds the highest number of shares. As for the start-up stage, younger start-ups with less funding usually give CEOs/founders more shares, and the percentage decreases as the start-up progresses and gains more stakeholders.

CEO equity at public companies is generally more “prescriptive” and is usually determined as a multiple of pay valued at the time of grant. CEOs can expect to be paid about 2/3 of their total compensation in equity-based awards. At the time of grant the targeted value is generally 1-3x the CEOs base pay.

These public-company awards are often split between time-based vesting and performance-based vesting with trends in recent years increasingly leaning towards performance goals driving the lion’s share of a CEOs total compensation.

Assessing Executive Compensation

There's no question that executive compensation is one of the best business tools companies can use to grow their company by attracting top talent strategically.

Check out the considerations below to help assess how much you should offer executive hires to help you achieve your business goals.

Company Stage

When a company is in its early stages, with little funding and revenue, there is little it can offer in terms of monetary compensation due to limited financing; hence, its competitive edge lies in offering equity, which promises a leveraged return on investment based on company performance.

Meanwhile, as a company grows, it can afford to pay more in terms of salaries and benefits. And with more stakeholders involved, it will have to offer fewer company shares. Ultimately, a company's revenue, profitability, or total shareholder return can determine how many shares a CEO earns.

Cash Flow and Fund

Cash liquidity and company value are the greatest drivers of average salary. When designing a compensation package with monetary and equity compensation, it is important to provide a compelling offer to executives who are likely to receive offers from your competitors.

Additionally, more funding and performance determine your budget for rewards packages. Incentivizing exceptional performance is key to driving results. Effective rewards and bonus plans are required to support these efforts.

Industry

Like any form of compensation, the amount and strategy are influenced by your industry. For example, tech start-ups are incredibly volatile and highly dependent on engineers. Offering high equity compensation packages to CTOs with vesting periods is common practice.

Location

Compensation is often dependent on the location of the business, but less critical for executives a than for other roles. How much an executive earns in a metro location may be higher than what they'd make in a less expensive city or state, but the geographic differentials are less important that company size and performance.

Company Culture

Another critical consideration when deciding how much equity to offer an executive hire is assessing their fit with your company culture. Equity offers are only valuable if the value of the company grows over time. Therefore, you would expect an executive to stay with a company for a handful of years at least. Finding someone who fits your company's culture is essential to aligning their interests with your company's stakeholders.

Get the Assistance of Professional Compensation Consultants

Determining a compelling salary package and equity compensation for your CEO is complicated. That's why you need the expertise and commitment of trusted services of HR consulting firms.

Working with compensation experts can help you create a compelling compensation package to fulfill your business goals. FutureSense has a team that includes some of the industries most respected experts. Reach out to us today to get the help you need through our equity compensation consulting services!

About FutureSense 

FutureSense is a management consulting firm that provides integrated solutions to build and sustain human capital capacity. The firm can work with you by offering support and guidance to manage your workforce. To learn more about FutureSense, please visit FutureSense.com.