Tuesday, April 10, 2007

Managing the Startup Board: the Compensation Review Process

Most VCs insist on requiring their startup boards to appoint a Compensation Committee, usually staffed by VC representatives and the odd independent board member. Great concept, but in practice these committees often don't shoulder the full workload one would expect of them.

There are lots of valid reasons for this shortfall: the size of the company, the demands of the rest of a VC's portfolio justify a succinct approach, a VC will argue. Unfortunately, executives seldom agree; they see an unstructured, limited process as arbitrary and even unfair. Particularly when VCs reschedule meetings due to other commitments; too often I have seen executives receive their annual bonuses 6 months late.

I often advise CEOs I work with to become actively involved in the Compensation Committee process, taking the lead in setting the Committee's schedule with them, to ensure that all of the duties one would expect from the Committee are performed. Here's a typical schedule:

February/March:

- Determine annual bonus plan awards
- Determine ESOP grants
- Review CEO performance and establish personal objectives for the coming year
- Review executive team stock holdings

April/May:

- Annual review of CEO and executives' base salaries

October/November:

- Outside consultant's analysis of competitiveness of compensation (note: this is not "What do we pay our other portfolio company teams?" At a minimum, purchasing compensation reports is appropriate)
- Outside consultant's analysis of company performance versus comparable companies

December:

- Establish corporate financial goals for annual bonus plan
- Independent director's compensation review

If your board is not following these steps in some way, it's time to rethink compensation review.

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