CEOs Buy Their Equity

Andrew Wilkinson shares his perspective on CEO compensation and equity, emphasizing the importance of alignment through meaningful financial commitment rather than traditional stock options. His approach focuses on creating shared risk and genuine investment in the company's success.

Key Points:

• Base Compensation Structure:

  • Lead with total compensation number, not just base salary
  • Split between base salary and performance-based bonus
  • Example: $300K total = $150K base + $150K bonus tied to EBITDA targets

• Bonus Philosophy:

  • Use uncapped bonuses to incentivize overperformance
  • Bonuses should be tied to profit growth
  • Pay bonuses from the additional profits they generate
  • Could reach 2-3x target bonus for exceptional performance

• Equity Approach:

  • Prefers cash investment over stock options
  • CEOs should "buy in" rather than receive free equity
  • Options for Equity Purchase:
    • Reduce compensation to buy equity
    • Use personal funds or stock portfolio
    • Take a personal loan from the company

• Why This Structure Works:

  • Creates true skin in the game
  • Ensures shared downside risk
  • Makes executives value equity more than stock options
  • Avoids binary "lottery ticket" mentality of options

• Common Pitfalls to Avoid:

  • Don't give equity without sacrifice
  • Avoid stock options which can demotivate if company value drops
  • Don't let executives treat equity as additional compensation
  • Be wary of requests for both high cash comp and significant equity

• Reality of Executive Preferences:

  • Most executives prefer cash over equity
  • They want tangible benefits (house additions, vacations)
  • Focus on cash incentives over equity when possible