Hey GirdleyWorld!
Today we’re getting tactical. I’m breaking down one of the most common questions I get as a HoldCo owner:
- How do you compensate a CEO who doesn’t own the business?
I’ll run you through my method. Then I’ll give you the spreadsheet template I use to do it, and leave you with a few things to think about.
(By the way: thanks to all of you, we’re at nearly 17,000 readers! If you want to reach a huge audience of entrepreneurs, investors, executives, and searchers… sponsor an issue! Email ty@girdley.com. He’s super nice.)
Let’s get into it!
---
How to compensate a CEO
When you buy a business as a HoldCo owner, you want to stay out of the weeds. You need someone operating the business at a high level, so you can think about the bigger picture still.
(Pro tip: Just don’t call your CEOs ‘operators’. They hate that! The reality is they’re more important than you so deserve proper respect!)
For your relationship to work for both of you, you need to get on the same page. So…
CEO compensation must align with the owner’s goals.
In other words, whatever behavior you incentivize is the behavior you’re going to get.
So if you want maximum profit but you incentivize maximum growth… you’re gonna have a bad time.
You also need to make sure that the comp structure makes both the CEO and the owners excited to come to work every day.
That means your structure will vary depending on how you tick. Some people build out complicated schemes that work great for them.
I have a crappy memory and I’m lazy, so I always want simple.
Here it is:
Now I’ll show you how I calculate those bonuses.
My simple bonus structure
The whole structure is laid out in a single spreadsheet that looks like this. I’ll walk you through it, then give you a download link at the end!
How the spreadsheet works
In the first section, we have the CEO’s name.
Then there’s two parts:
- Financial — what are the numbers saying?
- Objectives — what are the biggest essential goals?
We do a mix of the two for Jane.
In this example, her bonus is 70% financial and 30% objectives. Jane’s OTE (On Target Earnings) salary plus her bonus is $150k. She gets that if she hits her goals.
And no matter what, she gets her base salary each pay period.
Getting the Financial-based bonus
Next, fill in the EBITDA and Total Revenue boxes.
Filling in these boxes automatically updates the table below.
On the vertical axis, we have revenue. On the horizontal axis, we have Profitability. (You could make that EBITDA, Profit, NOI, FCF… up to you.)
Then all you have to do is follow the chart.
If the CEO hits 16.1% profits and $15.5mm revenue, she gets 100% of her bonus for the financials. And it scales up or down from there.
What I love about this is: no matter your goals as an owner, it works. Change the numbers, and you’re aligned with the CEO.
Getting the Objectives-based bonus
At the bottom, you can also include the goals that are important to you, the owner.
With my CEOs, we set goals each quarter. Then at the end of the quarter, we determine how much of those goals got accomplished.
Then the sheet calculates the bonus automatically.
MBOs stand for Management By Objectives. Just a fancy way of saying “goals” and I try to do these as S.M.A.R.T. goals always (Specific, Measurable, Achievable, Relevant, and Time-Bound.)
Also, it’s common for CEO and even COO compensation to be 100% tied to numbers. So don’t feel obligated to use the goals. In my experience, it’s usually the CEO who asks me for them.
And that’s it! Really!
Why I do it this way
Using a simple tool like this matches my style. It’s:
- Easy to understand
- Easy to remember
- Creates alignment
- Versatile
- Pays for overdelivering
- Results matter
Your style may differ, but this has worked great for me with a bunch of CEOs.
Try it out yourself!
You can download this spreadsheet right here (it's an XLSX file).
A final thought…
Comp and bonuses only have so much power when it comes to creating alignment.
There are other tools you can add to the equation, like ownership or vesting phantom stock. But in the end, compensation and bonuses just reinforce alignment that should already be there culturally.
The only foolproof way is to hire a great fit for the role.
Shameless self-promotion: I have a whole module on how to hire a great CEO in my Complete HoldCo Course! Check it out.
Though I might also write a newsletter on it… hit reply and let me know if that’s something you’re interested in!
---
Things that caught my eye this week
Appetizer: I made a video about how to hack Gen X’s mind (that’s me — I can confirm it works). Check it out and subscribe for new stuff every week!
Main: Check out this chart of China’s imports and exports. Their trade surplus is $857 billion. Fireworks is teeny tiny! Click for full size.
Dessert: I had a Slackbot tell me off this week for an incredibly mild curse word… and it reminded me of this classic:
Thank you for tuning in! Have a great week and see you next time.
Michael
