If you want more details on my entrepreneurial compensation research, the results in my Founder Discount paper, and some of the implications for our views of founders, the new edition of Harvard’s “Working Knowledge” publication has a feature-interview on it.
If you have any insights regarding the patterns I discuss there and the underlying dynamics that lead to them, feel free to post them here!
Noam,Just read your working knowledge piece. Very interesting. In my (limited) experience, whilst I do not doubt that there are several factors at play in different situations, the most powerful driver is the one that you identify last – that of the founder-CEO who keeps his pay low and uses it as an explicit bargaining tool in order to keep the compensation of other members of the top team (or even down through the organization) low also. It’s quite rational – let’s say a founder-CEO owns a third of the company – he is effectively getting back 1/3 of his discount through his ownership, but is (often) able to use that headline low comp number to drive much more out of his colleagues who have negligible ownership stakes (where he again reaps 1/3 of the benefit).
Noam,I work with the Board of a public company where the founder continues as CEO. There appear to be two reasons for the relatively low CEO pay; one you identified - no concern that he will leave. The second reason is that the Board feels he benefits enormously from growth in shareholder value due to his large ownership position. Relative to other CEOs, his pay package is very low in equity compensation whereas it is more competitive (albeit lower than median) in base salary and bonus. The more intriguing issue here is why the other executives stay while underpaid relative to market. There must be something to this Stewardship Theory, although it is unclear why the other executives don’t behave according to Agency Theory. I’ll be intrigued by your further research.D. Thomas
I think there is an element of altruism at work as well. Specifically, the founder initially takes a lower salary in order to pay more to others. Personally, I’d rather pay my people more than take a “market” salary myself.
I noticed you’ve got data on Ph.D. degree, but if you had data on who were the professors leaving academia to do the startup, I wonder how that would play out. At least in my experience, if this is something they’ve also been doing research on for years, then the Stewardship factor should also be much higher for them resulting in lower compensation early on all else equal. Just a thought.
One of the most difficult founder syndrom situations is when the nonprofit is founded out of crisis like a missing child and the child has never been found. The ambiguity of that situation, coupled with the deep pain and victimization that affects the founder(s), is what overshadows healthy logic for what’s best for the organization. That dynamic drives the culture and a board and/or staff’s ability (or inability) to constructively deal with key issues.
“There must be something to this Stewardship Theory, although it is unclear why the other executives don't behave according to Agency Theory”. Interesting words.