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Fremont: Who says that the current economic turmoil and liquidity challenges have placed CEO compensation in the spotlight? According to a recent poll by ExpertCEO, an online community for senior executives with over 2,200 members reveals that CEOs are expecting a raise in their total cash compensation for about 6 percent in 2011. This is primarily driven by robust bonus expectations. The participant of the poll believes that the total cash compensation will increase by an additional 9 percent with bonus growth again exceeding raises in base salaries.
But to our surprise, the executives of the venture-backed companies estimate to have an increase of 16 percent with roughly equivalent growth in base salary and performance bonuses in 2012. However, can companies who rely upon others to fund their survival and flourish be able to fulfill such huge expectations of their executives?
The rise in the perk of the CEO eventually depends on the success of the firms raising capital. Such raise is possible only when the startup raises a considerable amount of fund. With successful fund raising, the ownership stake of the CEO dilutes, it increases the dollar value of that ownership. The current recession where several giants are striving hard for their survival are chucking their employees to cut off their overall expenses. However, if the CEOs are expecting a hike in their pay, does it mean that this recession is going to end or has come to an end, and the market is again going to grow large?
Startups leverage recession, as it provides a better opportunity for them to grow. During recession, several big companies undergo economic turmoil and cut off on their several expenses and even the customers back off their products due to high cost. This provides a better opportunity for the startups who have best competing products and low cost. Such startups grow during recession. Due to this scope of increased sales and profit, there are several VCs who tend to invest in such companies, taking a few stakes in the company. But, every cash inflow from the VCs increases the chance of the survival of such companies. With every VC funding that the company raises, within a year of it, the pay of the CEO raises as raising fund is a difficult task. However, the executives who are not involved in the fund raising process are left out of such increment in pay.
On the other side of the coin, startups are always in need of cash to grow themselves, and at the situation when they are growing, they need to have certain cash reserve to be used during crisis. The raise can be kept on hold till the company break-evens and start making profit after keeping much for their reserve.
Not only does the CEOs and the VCs need to think over this, but the entire eco-system has to take a toil over the situation to see that it does not benefit one on the loss of others and put a check over the unnecessary money flow of the organization hard earned.
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