I recently participated as a speaker at the HR & Talent Tech Investor Summit 2022 (organised by Talint and sponsored by Deloitte), a business-to-business ‘speed dating’ event, allowing investors to reach entrepreneurs and vice versa. My special subject was executive incentives for growing businesses—what to look for and what to avoid.
The subject matter for my talk is informed by recent hands-on experience with some very non-traditional companies. If I stop the clock today, the clients we are currently helping are blockchain management companies, insurance and financial technology companies, cloud-based technology, a start-up in Mongolia, a company using NFTs in the antiques world, and several companies preparing for a stock market listing. There is a strong ‘gold-rush’ feel to it all, partly because the investment world is now so open to new ideas and is rapidly moving.
Consider how the capital world has changed. It used to be that raising funds involved ongoing meetings with well-heeled investment banking intermediaries—an expensive pastime. Instead, consider the business model of a cloud-based software company (SaaS or 'software as a service’) companies can look at their value on an almost monthly basis. Average Recurring Revenue (‘ARR’) is the key driver of value, but SaaS businesses can easily demonstrate revenue growth, EBITDA margin, revenue retention, new wins, and churn alongside that ARR on a dashboard. These kinds of companies are purpose-built for value creation. It is gratifying to see this evolution, because it makes the process of capital allocation to the newest technologies so immensely simple and straight-forward.
In terms of remuneration, my philosophy is that the correlating incentive design should be as simple: Just measure and reward those key attributes which drive value. Why not?
In truth, remuneration hasn’t caught up. There are a number of reasons why that might be the case, but chief among them is a reluctance on the part of senior executives. However young, however technology savvy they may be, it is often a bridge too far to sign up to a variable pay programme that has significant downside risk. The common theme, when speaking to founders, is that their journey has been a tougher road than that taken by others, that more equity is justified, and that fewer conditions on their pay are warranted. The posture is often one of looking back and being rewarded for what has been built thus far versus reward for pushing ahead.
It’s rather unexpected, isn’t it? The charge for boards advising this new breed of company is to help guide them into maturity without crushing the culture of innovation. It’s up to the remuneration committees—and their advisors—to show just how well a strategic incentive plan can help in that regard.
