I’m hiring a senior leader ("Alex") with deep industry expertise and a track record of driving growth. Alex will play a key role in generating new business, building operational capabilities, and expanding our market presence. I’d appreciate your insights on structuring their compensation to align incentives, reward performance, and remain simple to manage.
Goals for the Compensation Structure:
Alignment: Tie incentives to long-term value creation.
Simplicity: Avoid overly complex frameworks.
Performance-Based Rewards: Provide meaningful upside for recurring revenue contributions while fairly recognizing project-based revenue.
Challenges/Questions:
Recurring vs. Project-Based Revenue:
How should equity be tied to long-term recurring revenue versus one-time project-based revenue?
Should equity only reward recurring contributions, with project-based revenue compensated via commissions?
Equity Buy-In:
Should Alex buy a baseline percentage of equity upfront while earning additional equity through performance?
How do you determine a fair buy-in price for a small business without a recent valuation?
Attribution:
For recurring revenue, how do you measure Alex’s direct contributions versus the role of the existing business (e.g., delivery, admin)? How should equity awards adjust if recurring contracts terminate prematurely? Example Scenarios:
Alex secures a 4-year recurring revenue contract worth $100K EBITDA annually. How should this translate into equity?
Alex drives a one-time project worth $150K in EBITDA. Should this translate into commissions only, or equity as well?
What I’m Looking For:
If you’ve tackled similar challenges, I’d love to hear:
Frameworks or principles you’ve used.
How you’ve valued buy-ins for entrepreneurial hires.
Best practices for balancing fairness and simplicity in performance-based equity.
Thanks in advance for your insights!
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