BOSS PAY: Respected venture investor says best predictor of start-up success is low CEO pay…

tannercentre The Australian government’s War on Executive Salaries was reported around the region, with the main Singapore daily Straits Times reporting on ministerial pontifications and incorrectly labelling K-Rudd as the Tanner.

In a boom, it seems everyone wants to get rich, in a bust everyone wants to get the rich and string them up from the highest tree. We’d much prefer the former. It’s much more fun driving around in a Ferrari than slashing the tyres of one.

Food for thought though came from one of VEXNEWS growing army of twitter followers (join now, ask me how) who sent an article quoting a founder of Paypal and early investor in Facebook (not a bad start commercially) who declared:

The lower the CEO salary, the more likely it is to succeed.

The CEO’s salary sets a cap for everyone else.  If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders.  But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

Very interesting observation and certainly something for investors in Evan Thornley’s Better Place to carefully consider. He’s reputedly pulling $700,000 per annum. And his boss is no doubt getting a lot more than that with the company many years away from profitability.

The issue is not the level of CEO remuneration overall, it’s whether it’s linked to the results delivered to shareholders.

That’s the point Peter Thiel is making, in the context of a start-up, paying the senior staff a small amount until the company is profitable makes a lot of sense. Their incentives are usually in the form of shares or an instrument that allows them to buy shares at certain prices later or whatever.

Note he’s not proposing a cap. Quite the reverse, in his model, a spectacular result for him delivers a spectacular result for the CEO, just not in their pay cheque.

In more established enterprises, it is usually not possible, tax effective or desirable to give senior managers a large stake in the company to align their interests with shareholders, so instead they’re paid a lot.

A cap on executive salaries makes as much sense as a cap on how much wealth one could accumulate. Surely, a billion dollars is enough. Why not confiscate everyone’s fortune above that and distribute it to the deserving. Perhaps to bushfire victims, people with disabilities or the long-term unemployed.

For one good reason, those few in that category would be on the first private jet out of the place. Capital is mobile, as are people.

Not even Hugo Chavez in Venezuela has done such a thing yet.

Peter Thiel’s opinion on executive salaries is a common enough view in the venture capital world. He’s not a bloke in search of a socialist solution or playing envy politics, he just wants a big return on his investment and he’s perfectly willing to share a big chunk of that with those running the show once they’ve delivered. But not before.

That makes perfect sense.

What doesn’t is stoking the fires of jealousy, envy and blame in tough times. We need to help each other and unite not divide and rip each other apart to address the huge challenges ahead.

We need to restore confidence in and within the banks without overdoing regulation and interference from government, we need government to stop impeding growth at all levels from the smallest laziest local council to the federal Minister for the Environment. We need to shut down all remaining Greens party schemes that would shaft local manufacturers and job creators. We need to remember that a strong, vibrant, confident private sector is our only hope for protecting and growing jobs in Australia.

Issuing fatwas on capping executive pay does nothing to save a single job.  We know what we have to do. It’s time to get deadly serious, ignore distractions, and get on with the job.

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2 Comments

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2 responses to “BOSS PAY: Respected venture investor says best predictor of start-up success is low CEO pay…

  1. Voice

    Excellent thoughts to ponder.

    Apart from greed, I can never understand why people think they have the right to take the rewards before their achievements.

  2. tHE jOKER

    Greed is a powerful emotion, but I think this issue relates to the responsibility shareholders should exercise.

    It’s not practical to cap exec salaries – it’s up to shareholders to restrain them.

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