Executive compensation for startups: How to balance structure with the flexibility you need

"Your total compensation is about half what I'd expect."

The words every startup founder dreads hearing from their dream CFO candidate. 

You’re hiring your first non-founder executive. You thought you'd been generous. They think you're lowballing them. 

This is the moment most startups realise they have no idea how to properly structure executive compensation.

The compensation framework you have in place for the rest of the organisation isn’t helping, because every executive hire is high-stakes, every candidate brings different expectations, and market benchmarks for executive packages vary wildly.

You need enough structure to make defensible decisions, whilst maintaining the discretion to negotiate competitive packages that win the leaders you need. Lean too far either way and you'll either lose great candidates or create inconsistencies that become impossible to defend as you scale.

It isn’t easy, so we’ve brought in the experts to share their advice on designing executive compensation for startups and private companies – Rob Green (Founder of Darwin Total Rewards) and Figen Zaim (Founder of Olivier Reward Consulting).

The key components of an executive compensation package

Executive compensation packages combine multiple elements to create a competitive total offer: base salary, short-term incentives, long-term incentives (typically equity), and benefits. 

“Leveraging every element of total compensation is important for every employee in a company, but it’s especially important for executives,” says Figen Zaim. “Aim for a holistic package that isn’t overreliant on one element.”

• Base salary provides the fixed cash foundation.
• Short-term incentives reward executives for hitting specific targets, most commonly in the form of quarterly or annual performance bonuses.
• Long-term incentives aim to focus executives on future outcomes and desired results over a longer period of time – usually in the form of equity compensation that vests over a given period of time or in-line with defined performance outcomes, but it can also be a cash-based award that triggers in line with long-term, phased targets. If LTIs are an important component, the executive compensation plan should also include how refresh grants will work to retain executives after initial equity vests.
• One-off hiring incentives like signing bonuses (to offset equity forfeited at previous companies) or relocation packages (for international hires required to be onsite) help close competitive gaps without permanently inflating the compensation structure.
• Benefits and perks typically extend way beyond standard employee benefits and often include benefits such as enhanced retirement contributions, comprehensive health insurance covering family members, company car allowances, relocation support, and executive coaching.

The right mix depends entirely on your company context – so before determining the total compensation mix, you need philosophical alignment on what's right for your company.

"Most of my compensation projects start with what I call the 'anchoring conversation'," explains Rob Green. "I sit down with the CHRO, the founder, and the rest of the C-suite, to discuss the core principles behind how employees (including executives) should be compensated.”

“What typically plays out is that I hear four or five different philosophies in that room.”

This misalignment is why executive compensation projects often feel stuck before they've even started. One leader believes market-leading compensation to bring top leaders in is crucial for the company’s success, another wants to preserve cash and over-index on equity, another thinks avoiding ownership dilution is vital, and the founder thinks the company's mission should be enough to win talent. 

"It can lead to quite sticky conversations at the start," Rob continues. "But you need to understand the different perspectives before you can move forward."

The compensation philosophy conversation should cover:

• Leadership core beliefs about compensation: Should pay be market-driven or mission-driven? How much does ownership dilution matter? Should loyalty be rewarded differently than performance?
• Cultural priorities: What kind of workforce are you aiming to shape?
• Growth trajectory: Where are you headed in the next 2-3 years?
• Financial constraints: What can you actually afford with the existing business model, revenue projections, and headcount plan?
• Candidate risk: How much are you asking employees and executives to bet on the company's future?
• Talent pool: Which markets and companies does the organisation want to attract and retain talent from?

Once you've aligned on these principles, the total compensation mix starts to emerge. 

A company with stable cash flow and an aversion to equity dilution might lean toward competitive base salaries and bonus structures. A pre-revenue startup asking executives to take significant risk might compensate with larger equity grants. A company focused on hitting aggressive annual revenue targets might build in meaningful short-term incentives tied to those KPIs.

How to overcome common challenges in executive compensation design 

With these components and philosophical foundations in place, you're ready to start designing executive packages. 

But even with strong foundations, certain challenges consistently trip up Reward Leaders working on executive compensation plans.

Here's how our experts navigate those challenges.

Challenge 1: The Reward leader wants structure, the founder wants flexibility

"Sometimes you go in with a structured approach – let's look at our philosophy, let's look at who your peers are, what they're doing, can we get the feel of the market – but they already have the output in mind," explains Figen. "Really they just want you to validate their view."

This is one of the most common tensions in executive compensation work. The Reward professional wants fairness, consistency, and defensibility. The founder wants the discretion to negotiate for each individual candidate’s needs.

The solution isn't to force structure where it doesn't fit.

Instead, it’s about education: “At least 10% of an executive compensation project is education, especially if you’re working with first-time founders,” says Figen, “you need to help them understand the implications of their choices.”

And then it’s about enabling flexibility: “Flexibility and adaptability is crucial as a Reward professional working on executive compensation,” says Rob. “Enable the discretion your stakeholders and business need, whilst always flagging the pros and cons if the approach goes outside of agreed principles or governance.”

Take market positioning, for instance. You need to use market benchmarks to understand what's required to win and retain talent amongst your peer group (more on this later), but those benchmarks are used directionally rather than as a rigid compensation range.

In practice, that means designing flexibility into the executive compensation approach:

• Establish the core principles like market positioning philosophy and pay equity guardrails.
• Highlight non-negotiables to follow – areas where flexibility will create real risk, like pay equity issues or retention problems when executives are partially or fully vested with no refreshes.
• Focus on total compensation alignment rather than individual components – target market positioning for the total package (e.g. 50th percentile overall) whilst allowing flexibility on how that's split between base, bonus, and equity.
• Use market benchmarks directionally, not as rigid targets – executive compensation requires interpreting market data through your company's specific context, which might mean broader target percentiles e.g. base pay sits anywhere from 40th to 60th percentile, as long as total compensation lands in the right place.
• Create guidelines on how to leverage each total compensation lever – depending on the role (a CRO might have heavier variable comp than a CFO), the goals (aggressive growth targets might warrant bigger short-term performance bonuses), and individual candidate expectations.
• Accept that founders will sometimes override your logic, and that's part of the process
• Document the approach so there's a record of the principles and governance, including where flexibility can be used.

Challenge 2: One board member or founder is steering the ship in a different direction

As Rob highlighted earlier, it’s common to see founders or leaders with very different opinions on compensation – including executive compensation – should be done.

When one voice dominates and pulls in a different direction, it can derail the entire process.

“I’ve had situations where we’ve aligned on a clear plan, and then the CEO still goes against it,” Rob shares. “In one instance, it meant a C-level member was deliberately left with no equity to vest. It was an immediate retention issue, but by design, it’s what the CEO wanted.” 

There’s always something driving this kind of decision. 

In Rob’s scenario, for instance, “the company was going through an evolution in their culture and performance management” that meant the impact on retention was an accepted risk in the short term.

Understand why they're steering in this direction, uncover any context you’re missing, and then make the risks explicit. 

"In most cases it’s just the practicalities of the organisation," Rob says. “The Reward function's role is to advise and flag pros and cons, in support of finding strategic solutions.”

Challenge 3: Leaders want to over-index on equity compensation

Some founders see equity as the solution to every executive compensation challenge. Can't afford competitive salaries or bonuses? Add more equity. Need to win over a great executive candidate? Add more equity.

"I've worked with startup clients that don't believe in bonuses," says Figen. "They don’t want to spend the cash or they don’t see how performance can be objectively measured, so they'd rather just add more equity onto the executive package.”

"It makes equity sound like monopoly money, like it isn’t really important to the company,” she adds, “when actually having equity should feel like an exclusive club.”

Plus, as Rob adds, equity is only a persuasive compensation lever if the path to liquidity feels achievable. “If you’re accelerating on equity, but there’s actually no fuel in the tank – no valuation or no communication about what equity means – then it becomes very problematic.”

Equity is a crucial element of startup executive compensation, but it isn’t the only lever – as we’ve already seen, leveraging all aspects of total rewards is crucial. 

When leaders want to over-index on equity:

• Educate on the risks of overuse (it devalues equity, dilutes ownership, creates retention issues when everyone's fully vested)
• Push for using all compensation levers strategically and in-line with the overarching philosophy
• Ensure proper equity communication and valuation processes are in place
• Get agreement on how equity refreshes will work before initial grants vest.

Challenge 4: Getting the peer group right for executive compensation benchmarking

You need to understand market rates, but executive compensation benchmarking is notoriously difficult – small sample sizes because there’s only a handful of executives per company, and a lot of volatility due to the wide-ranging approaches to total compensation. 

Both Figen and Rob agree that defining the right peer group is key. 

The two common peer group mistakes are:

• Going too narrow: “Sometimes it’s like the founders won’t settle for anything other than an exact replica of their company,” says Figen. “It becomes way too focused, you need around 25-30 companies for a healthy executive peer group.”
• Going too broad: “Then you have others who go completely off the charts,” says Figen. “The ‘peers’ have vastly different business models or headcounts or global markets – and often they’ll include listed companies, who approach executive compensation in a very different way.” 

Rob's approach is to cut through this and get to the heart of the company’s actual talent competitors: "The key question I always ask is: if you had to rehire your C-level tomorrow, where would you hire them from?"

"Typically they'll give you a short menu, but it’s easier to build on that menu than to start from something too wide," Rob explains.

Challenge 5: Figuring out fairness across different executive roles

When you have multiple executives, determining fair relative compensation becomes surprisingly complex.

"I've been asked if I can do a salary band for the C-level," says Figen. "That was a bit like: how do you say no in the nicest possible way?"

The problem with creating one pay range for all executives is that it assumes all C-level roles are comparable and have equal value to the business. 

That’s rarely true in actuality: executives' responsibilities, and even levels of seniority, differ significantly.  

"My first question is: do you consider all C-levels to be at the same job level?" Figen explains. "Normally companies do slice and dice their C-level, with layers of seniority even within the executive team.” 

“It’s really about finding the benchmark for the role they actually do,” she continues. 

“A CRO and a CFO have very different roles, so you wouldn’t expect them to be paid at the same level. For private companies, VC or PE-backing also has an influence – if investors are pushing for a focus on revenue, then the Chief Revenue Officer might be more valuable to your company than to those in your peer group.” 

To get this right:

• Start with value to your business. Different executive roles have different scopes and different impacts on company success, and which ones are most important varies depending on business model and company context.
• Layer market benchmarks with your company's context. Understand competitive compensation for each specific role, but use benchmarks directionally, adjusted for what matters most to your business. To continue the example above, if revenue is the core focus, you might target 65-75th percentile for your CRO whilst targeting 50-60th for other executives.
• Balance existing reality with future vision. If you've got existing C-levels, can you adapt their current compensation to align with your new plan? "If you’re doing this exercise for the first time, it’s likely there were gaps in the thinking when previous execs were hired,” says Rob, “and often it’s about finding the balance between current packages and what the market says.”
• Be prepared to defend differences. Pay equity matters, especially in the age of the EU Pay Transparency Directive, but 'equitable pay' is proportional to the value of the role. As long as you can explain and justify that, executives don't need identical packages.

To sum up: Core principles for executive compensation at startups

Getting executive compensation right at a startup is all about navigating the tension between structure and flexibility.

As Figen put it: "Never let go of your logical way of doing things – it's a superpower of Rewards professionals. But expect the grey areas so you aren't disheartened when they arise. Understand the situation, and then use your creativity to find the middle ground."

To wrap things up, here are the core principles we’ve seen on designing executive compensation plans: 

• Start with philosophical alignment. Before diving into benchmarks or pay mix, align your leadership team on the core principles behind executive compensation. What are you optimising for? What risks are you asking executives to take? What can you actually afford?
• Use all compensation levers strategically. Don't over-index on any single element, whether that's equity, base salary, or bonuses. Leverage every component of total rewards to create holistic packages that are competitive and financially sustainable.
• Design for flexibility from the start. Build an approach with clear principles and non-negotiables, but allow discretion on how to apply them to individual candidates –  expect that founders will override your recommendations, context will shift priorities, and perfect structure won't always be possible or desirable.
• Use market data directionally, not as gospel. Executive compensation benchmarks inform your decisions, they don't dictate them. Understand what's required to win talent amongst your peer group, but interpret that data through the lens of your company's specific priorities and constraints.
• Think about fairness as proportional value. Different executive roles have different scopes, different market rates, and different importance to your business model. Equitable compensation means paying proportional to value, not identical packages.