The Silicon Valley tech startup world is constantly evolving. The latest evolution, particularly during and post the pandemic, is the number of CEOs getting massive paydays in the form of special stock awards as these tech companies prepare to go public. Gone are the days when Silicon Valley leaders like Jeff Bezos and Mark Zuckerberg took little or nothing in salaries or stock options during an IPO and put their efforts solely into creating value-generating companies that helped benefit them eventually from the rising value of the stock. One would imagine that the highest-paid CEOs of public companies would be heading traditional giants of corporate America such as Pepsi or Microsoft, but in 2020, seven out of the top ten most valuable compensation packages of 2020 were given to CEOs of startups that listed in 2020.
Granted that most of this compensation is tied to performance and growth targets, it is essential that there remains transparency from the beginning and that these startups find a balance. Under California Law, executives of any company including founders have two basic fiduciary duties: the duty to take actions that are in the best interests of the corporation and the duty of taking such actions with care after carrying out reasonable inquiry. In addition to these fiduciary duties, managing organizational structures, strategy, and communication with all stakeholders across the board, founder CEOs are the brains behind these startups and are responsible for the overall success of their businesses. But the chaos caused by the founders of startups such as WeWork Cos Inc and Theranos Inc. should be a reminder that it is essential that legislation provide a more detailed roadmap apart from these two duties to keep founders accountable for their actions to protect the interest of the shareholders. With the monetary benefits usually skewed heavily in the favor of the founders, there must be boundaries and some form of cap to prevent such situations from occurring again. At the same time, it is also pertinent for the legislation to attempt to control the growing divide that hefty pay packages are creating between such CEOS, executives, and regular employees.
Obnoxious pay packages are a red flag, but investors and key backers believe that these pay packages are one of the most common methods to motivate founders, who commonly are the brains behind the show, to remain at the helm and to sustain rapid growth. Proponents of this argument claim that since these founders only receive most of their pay packages if the company grows substantially in terms of value, the benefit in fact is received by all stakeholders and shareholders. It is also beneficial to tie down key executives in the technology world, where employee turnover rate is the highest and the median tenure can be as little as one year. A number of investors also believe that since the tech companies rise under the leadership of their founders, it is worth holding onto the founder even if remuneration amounts go through the roof.
Former WeWork CEO, Adam Neumann, is a perfect example of rich pay packages that frustrated investors, venture capital funds, and destroyed standards of U.S. corporate governance that is expected of high-level executives of billion-dollar corporations. Elizabeth Holmes, disgraced founder of the now defunct startup, Theranos Inc., is another example of a high-flying CEO who violated all possible standards of ethics and corporate responsibility leading to numerous lawsuits and an eventual collapse of her startup. With founders already having a significant amount of power, the large compensation packages tend to transfer payout costs to future public or non-public investors who have little or no say in such costs. They also lead to the growing pay divide between the executives and regular employees. In 2020, Alex Karp, co-founder of Palantir, received the highest compensation package of any U.S. public company on record since 2007. While his company has never posted a profit, Mr. Karp took home $1.1 billion, roughly 8,943 times the compensation received by his average employee.
In today’s free-market, direct policy changes made by the legislation to safeguard the actions of such CEOs, like lowering CEO salaries to ensure that their incentives remain aligned with the entire company might be labeled as draconian or an act of governmental overreach. But with tech stocks flying high during the pandemic and more money being poured into the industry, it is important to not forget the disasters of Neumann or Holmes. It is crucial that founders are constantly incentivized to keep their personal goals aligned with those of their investors and employees. When compensation is through a time-based or a milestone-based equity vested program, policy could be introduced to provide a system of checks and balances to ensure that prioritization of the milestone itself does not undercut securities regulations, fair trade practices, or violate standards of corporate governance. To tackle the growing imbalance of executive compensation, Kets de Vries, Dutch management scholar and founder of INSEAD’s Global Leadership Centre, has previously suggested the implementation of higher marginal income tax rates at the very top and high corporate tax rates for firms that have very high CEO-to-worker compensation ratios. The Economic Policy Institute even went as far as suggesting that firm’s shareholders should have a greater ‘say on pay’, a right to vote on top executives’ compensation.
Whether any of these policy changes will ever see the light of day is something that only time shall tell. But with the global economy becoming more and more transparent, it is time to focus the debate on the ever-burgeoning startup founder compensation packages and whether they contribute to a sustainable business.