KITSAP/BUSINESS—For people to be fully committed, they should be adequately compensated. Whenever an entrepreneur invests in his company, the very first thing he should be thinking about is how much he will pay himself?
Yes, a company does better the less it pays the CEO—that’s one of the single most evident patterns noticed in a survey done (Survey was done to study investments done in startups. In no case should a CEO of an early-stage venture-backed startup receive more than $150 000 per year in salary? It doesn’t matter if he got used to making much more than that at Google or if he has a large mortgage and hefty private school tuition bills. If a CEO collects $300,000 per year, he risks becoming more like a politician than a founder.
High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
Low CEO pay also sets the standard for everyone else. Aaron Levie, the CEO of Box, was always careful to pay himself less than everyone else in the company—four years after he started Box, he was still living two blocks away from HQ in a one-bedroom apartment with no furniture except a mattress.
Every employee noticed his apparent commitment to the company’s mission and emulated it. If a CEO doesn’t set an example by taking the lowest salary in the company, he can do the same thing by drawing the highest salary. So long as that figure is still modest, it sets an effective ceiling on cash compensation.
Cash is attractive.
It offers pure optionality: once you get your paycheck, you can do anything you want with it. However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. A cash bonus is slightly better than a cash salary—at least it’s contingent on a job well done. But even so-called incentive pay encourages short-term thinking and value grabbing. Any cash is more about the present than the future.
Even billionaire investors like Warren Buffett agree. In a 2014 letter to Berkshire Hathaway shareholders, he wrote that cash is a riskier investment over the long term than stocks due to the potential of inflation wiping away any gains.
A company with cash is not necessarily bad, but investors can get ornery when there’s too much. If you’re a shareholder, you want to see that money returned to you in the form of a dividend, used for acquisitions or stock buybacks, or reinvested to grow the company’s businesses. Apple, which consistently has more than $100 billion in cash on hand, began issuing dividends after facing criticism from investors.