7. How Does the CEO Get Paid?

Corey Ferengul: 00:00

Alright. It's time to open the c suite. I'm Corey. I'm Mike. And and today's gonna be a little bit of a shorter episode, but it's a question I've gotten multiple times in the last couple of weeks.

Corey Ferengul: 00:10

How does the CEO get paid? And is there people calling me that are new to a CEO role, get it for the first time, like, well, what do I expect? What should I be getting from the company? So I mean, start out with Mike. How did you get paid to see you?

Mike Shannon: 00:24

Well, for 1, when I my nascent career started when I was, you know, 21, 22 Yeah. I would have been surprised if I was getting paid anything. So Yep.

Corey Ferengul: 00:32

I'll I'll be a little bit

Mike Shannon: 00:33

more than for a

Corey Ferengul: 00:34

while that was that happened.

Mike Shannon: 00:36

No. Things did did mature, made a living. It's fine. But, yeah. I'll I'll maybe ask you a few of the questions.

Mike Shannon: 00:41

But you you actually had a few of our listeners reach out to you to talk. This wasn't in our queue of topics. No. So what were the questions you were getting? What are some of

Corey Ferengul: 00:50

the questions? Yeah. How much should I expect? The the one that really gets me is should I be the highest paid person in the company. Right?

Corey Ferengul: 00:56

And the first answer to that is typically no. More times than not, you know, look. If you're the CEO of Disney, different story. But if you're in that, you know, 50, $200,000,000 kinda company range, I've been up to been a company up to $1,000,000,000. Usually, the head of sales is making more.

Corey Ferengul: 01:12

Yeah. Maybe even your top sales people are making more than the CEO.

Mike Shannon: 01:15

Yeah.

Corey Ferengul: 01:15

And and that's on the cash comp side. And at CEO, you know, so that's kind of one areas. Am am I expecting to be the the top person there? The next is, what what's my comp versus a mix of of straight up salary versus bonus?

Mike Shannon: 01:28

Yeah.

Corey Ferengul: 01:29

And usually, you see very much a 5050.

Mike Shannon: 01:31

Okay.

Corey Ferengul: 01:32

You know, half of it in base, half of it in bonus. Maybe it goes 6040 based to bonus. But you should expect a substantial portion, probably most in the company Okay. To be bonus. And then what are the components of that bonus?

Corey Ferengul: 01:44

The ones I most typically see, it's, EBITDA and revenue. So are you hitting your growth numbers and hitting your profitability numbers? Lot of times, I'll see that also traverse to the whole management team, and they'll all be comped on those financial metrics. If you're a public company, it could be based on valuation or stock price, but more likely, it's gonna be on those metrics because those are gonna drive the stock price anyway. And then the last big question is equity.

Corey Ferengul: 02:08

Yeah. How much equity should I expect? So I have seen a rule of thumb, earlier stage company, less than 50,000,000 in revenue. You're probably looking at about a 5% equity if you're coming in from the outside walking in. Typically

Mike Shannon: 02:21

CEO for hire.

Corey Ferengul: 02:22

CEO for hire. Right? You're looking at about a 4 year vesting. It's very typical. But to if you're still there after 4 years, getting some additional equity.

Corey Ferengul: 02:31

But that equity comes in the form of options that would be priced at whatever that new value is.

Mike Shannon: 02:36

Yeah.

Corey Ferengul: 02:36

So you're you know, each time is if you're coming from the outside, like yourself, you're the founder. You had founding options. Totally different. Founding shares, actually.

Mike Shannon: 02:44

Yeah.

Corey Ferengul: 02:45

If you're coming from the outside, you're gonna expect options priced at the current value, and you're gonna profit in the upside you helped build for the company. 5% out of the gate is typical. Could see a little bit more than that if it's a smaller company. Could see a little less than that if it's a larger, more established company and the risk profile is down. Usually, it what happens is if you're called a $100,000,000 company, you might see a little bit less on the equity side, a little more on the cash comp side.

Corey Ferengul: 03:13

It all kinda depends. But that 5% range is a a benchmark that, you know, making about 50 salary of, base salary versus bonus, and, yeah, you probably won't be the highest paid person in the company.

Mike Shannon: 03:28

Well and and one clarification on the equity. Yep. So I have some shared experience where as we had a financial model and some Yeah. Predictability in the business, you know, 8, 9, 10,000,000 in revenue, full exec team is kinda tied to the p and l to Yep. To some degree.

Mike Shannon: 03:45

On the equity piece though, what I think can be a confusing part. You you just said, you know, 5%. So okay. Does that mean, alright, this company is, you know, 50,000,000 in revenue. So let's say it's worth, you know, whatever.

Mike Shannon: 03:56

200, 250,000,000. Oh, 5%. I've got that times 250,000,000. It's not the case. Right?

Mike Shannon: 04:02

You've got the 5% of the day you start the gain

Corey Ferengul: 04:06

Yes.

Mike Shannon: 04:06

On what the valuation is at that point which is your strike price.

Corey Ferengul: 04:09

Effectively, that's it. Because you get a strike price. Right? And so you're getting, you know, call it 5% of ownership value, but that ownership meaning of the share number

Mike Shannon: 04:19

of shares.

Corey Ferengul: 04:20

But it's priced at the current market price, and you're gaining when the company gains.

Mike Shannon: 04:25

And I think so for, like, the wider audience that we have here of, you know, opening the c suite, how does that stuff work? What it means is you can join as just simple numbers. Yeah. CEO of a company worth a $100,000,000, 5% equity. You're not handed $5,000,000.

Mike Shannon: 04:40

No. It's you are tasked now with growing this That's right. From being a $100,000,000 company to 1.50, 200, whatever. And you'll get a percentage of of what you drive, which could go the other way. And the equity could then

Corey Ferengul: 04:51

be on the water. All the time. It is not uncommon to get to a transaction and members of the management team have zero value to their account. Yeah. Right?

Corey Ferengul: 05:00

So and that's a whole other discussion to

Mike Shannon: 05:02

do that. Different, you know, kind of scenario.

Corey Ferengul: 05:04

But yeah. Absolutely. So so yeah. You're you are there to take you're not getting it cash that day. You're not getting, you know, direct ownership that day.

Corey Ferengul: 05:14

Yeah. And it does vest. So you have to stay over the lifetime

Mike Shannon: 05:18

Yeah.

Corey Ferengul: 05:18

Of the vesting, 4 years being typical. And it's also not unusual to see a 1st year before the 1st chunk vest and then going monthly after that. So that is a really big deal. You know, some people think you walk in the door, here's $5,000,000 and you got it right away. No.

Corey Ferengul: 05:32

You're there to earn the value of the upside, and you only get it if you spend the time there. Other big item is you typically do see acceleration on a transaction. So if we transact the business, then for sure your stock stock should all vest. I will see

Mike Shannon: 05:50

pause to clarify that word you just use. Yes. Acceleration means if you've got a 4 year vest period

Corey Ferengul: 05:56

Yep.

Mike Shannon: 05:57

You're 2 years in and the company sells

Corey Ferengul: 05:59

All 4 years vest.

Mike Shannon: 06:01

That's the accelerate.

Corey Ferengul: 06:01

That's the typical you typically see that. It is sometimes plays out as what's called a double trigger, which means it only vests if 2 things happen. You sell the company and you're let go as an executive. So that is sometimes in there, not uncommon, but, you know, really based on how the investors like to do that.

Mike Shannon: 06:22

You've gotta figure out how to get fired to then get the

Corey Ferengul: 06:24

right Yeah. Yeah. I I have a

Mike Shannon: 06:25

great story. Fired, you're still getting compensated. I got

Corey Ferengul: 06:27

a great story about an old friend of mine who, we are our company we're with got acquired, and he had a double trigger. And so he went in there and began to talk about his illicit dealings with other things as

Mike Shannon: 06:38

a

Corey Ferengul: 06:38

way of getting him. He got him fired. He did a good job. But, yeah. You gotta get yourself fired.

Corey Ferengul: 06:43

If you're

Mike Shannon: 06:43

younger in your career, maybe don't do that.

Corey Ferengul: 06:45

Exactly. Depending on the reputation you're going for. Right. Right. But he but, what you're looking at is, you know, will it accelerate on a transaction?

Corey Ferengul: 06:53

How will it accelerate on a transaction? If I were negotiating, I would look for a 100% acceleration on a transaction. And if they say it's a double trigger, that's not uncommon. That's okay. And and, you know, last is, a lot of it has to do with just what do the investors really want out of you.

Corey Ferengul: 07:14

Are they gonna do they do they really want you to drive the value of the equity, which is what they typically want, so they may over index there? Are they more worried about profitability, so they're gonna put more into your bonus? So don't be surprised if you see all of these variables moved around. And what you're reading through that is, what behavior are they trying to incent? Do they want me to get profitable and they're putting more bonus there?

Corey Ferengul: 07:34

They really just worry about the top line value of the company. They're they're putting more of it there. You know, those are all the the chips that they have to move around, and that's, you know

Mike Shannon: 07:43

Well, 2 of the things that you said earlier which, you know, something of a theme here and look this can go all over the place. Yep. Right? People can read, you know, article on somebody's cash compensation being through the roof and all all that happens. But there's this degree of skin in the game is sort of a theme that I think you just spoke to with, one if the if the comp is over 50% bonus based

Corey Ferengul: 08:06

Yeah.

Mike Shannon: 08:06

On performance of the year and then the equity that one isn't just handing you 5%. It's

Corey Ferengul: 08:12

That's right.

Mike Shannon: 08:12

Above a strike price which can go lower. That's right. So there's this theme that it sounds like if it's done right, which as a board member you've probably been on the comp committees of wanting it to be done right. There's this high degree of skin in the game Yeah. As CEO which as a founder CEO that's like all we know.

Corey Ferengul: 08:28

That's right.

Mike Shannon: 08:29

Is that we come in with basically no compensation.

Corey Ferengul: 08:32

Yep.

Mike Shannon: 08:32

All equity. It's all skin in the game. Yep. And it sounds like you're saying that if it's done right at the CEO higher, you try to emulate some degree. It's not quite the same as my owner CEO, but some degree of

Corey Ferengul: 08:43

Absolutely. No. Absolutely the same. And to be honest, public companies, when I've been a public company exec, it was not that dissimilar. You know, all of the gains that we really made, yeah, made a really nice salary, did well, but the real gains were all in the stock options all because of the appreciation of the stock price.

Corey Ferengul: 09:00

Yeah. And that's, you know, once you get into public companies and if you become a named executive and how you sell that inside information, that's how you do you liquidate your your, your options. That's a whole different story. The, but the, you know, the reality is it it's all about how do you, you know, how do you want to be paid now? Yeah.

Corey Ferengul: 09:22

Do you want the cash now? In which case, you wanna index on that or you're gonna have to give up some equity.

Mike Shannon: 09:26

Yeah. Right.

Corey Ferengul: 09:27

In which case, by the way, your shareholders usually okay with that because to your point, they'd like you to have skin in the game.

Mike Shannon: 09:31

Well, when you're interviewing, you need to really have optimism of where it's going to. So there's kind of an inverse message that you send if you don't want it to be heavily, you know, incentivized.

Corey Ferengul: 09:40

Well, and they want you to have skin in the game to your point, but they also many times are okay not to do it themselves. Yeah. So finding that balance. Yeah. So so that is just a quick hit to give you some pointers on how a CEO gets paid and compensation is a bigger topic than that, but that gets you going.