How to build an executive compensation package at an owner-led company

Owners often set a leader's pay one number at a time: a base that feels fair, then a bonus decided in December. Candidates compare the whole package, and the strong ones already have a formula at their current job.

An executive compensation package has 4 parts. Build each one on purpose, and write all of it down before you make the offer.

The 4 parts of the package

Part	What it pays for	Common form
Base salary	The job	A fixed salary, set from market data
Annual bonus	This year's results	A % of base, paid on a written formula
Long-term pay	Staying, and growing the company's value	Phantom equity, a profit share or real equity, with vesting
Benefits and perks	The rest of the cost	Health coverage, retirement match, vehicle and time off

Base salary

Start from public pay data for the role in your industry and metro, then adjust for the size of the job. Our guides to COO compensation and general manager compensation have the Bureau of Labor Statistics numbers.

Public wage data leaves out year-end bonuses and long-term pay. Treat it as the floor of the conversation.

Leave yourself room. If base starts at the top of the range, you'll have nothing to give at the first review.

How to structure the annual bonus

Pick 2 to 4 measures the leader controls. For a COO, that might be company gross margin and on-time delivery. For a GM, location profit and team turnover. With more than 4, none of them carry much weight.

Set a threshold, a target and a cap. The threshold is where the bonus starts paying. The cap keeps a windfall year from turning into a payout you regret.

Here's an example for a GM with a bonus target of 25% of base, measured on location profit against plan:

Location profit vs. plan	Bonus paid
Below 90%	Nothing
90%	10% of base
100%	25% of base
120% or more	40% of base (the cap)

These are example numbers. Set yours with your CPA, based on what your margins can carry.

Say when it's paid. Pick a date, like 60 days after the books close, and say whether the leader has to still be employed on that date.

Put it in the offer letter. A bonus the owner decides at year end feels like a gift. A candidate who already has a formula won't leave it for one.

Long-term pay

This is the part that keeps a leader through the hard years. At an owner-led company, it usually takes 1 of 3 forms.

Phantom equity. The leader earns a cash award tied to the growth in the company's value, paid when the company sells or on set dates. No shares change hands, so the owner keeps control.

Profit share. The leader earns a percentage of profit above a set level, paid each year or held back and paid out over time.

Real equity. Shares, or a path to buy in. This one changes who owns the company, so it's usually saved for a successor or a future partner.

Vesting. Whatever you choose, tie it to time. Vesting over 3 to 5 years is common. Decide up front what happens if the leader leaves early, and what happens if you sell.

Have your CPA and attorney set up any long-term plan. Deferred pay has tax rules, under Section 409A of the tax code, that are easy to get wrong.

If you're PE-backed, long-term pay often comes from the fund's equity plan, and your operating partner sets the terms.

Benefits and perks

Benefits make up 30% of what private employers spend on pay and benefits combined, according to BLS. A candidate with a family will price your health plan against the one they have.

The rest depends on the job:

• A vehicle or allowance for leaders who split their week between the office and the field.
• Time off, stated as a number of days.
• Relocation, if they're moving. A spouse has to say yes too.
• A signing or make-whole payment if leaving costs them a bonus they've almost earned.

Before you make the offer

Lay your package next to what the candidate earns today, line by line. Ask what their bonus actually paid in each of the last 3 years, because a target and a payout are often different numbers.

The free offer worksheet at the top of this page has a column for each. Once the offer is accepted, the owner's side of the first 90 days covers what comes next.