CEO Compensation in Venture Capital Markets
41 Pages Posted: 3 Jan 2008
Date Written: January 2, 2008
Abstract
We study the compensation earned by CEOs in private venture-backed firms. We extend the traditional view of pay-for-performance by proposing that the economic characteristics of startups and venture capital markets interact in such a way that CEOs will be rewarded for successfully raising new equity. In a novel dataset of 1,585 U.S. companies, we demonstrate that CEO total cash pay is strongly increasing in the quantity and quality of money raised in the firm's most recent equity round, and in the cumulative amount of venture funding secured. The link between cash compensation and fundraising success is stronger when fundraising is more difficult and more important. Our results hold for both founder and non-founder CEOs. We also show CEO total cash pay is positively associated with operating performance metrics such as revenues and employees. Overall, our findings suggest that the complex set of equity incentives and non-compensation governance mechanisms that venture capitalists put in place to solve agency problems are complemented by performance-based CEO cash pay.
Keywords: CEO compensation, Successful equity financing, Pay-for-Performance, Private venture-backed companies
JEL Classification: J33, M13, M52
Suggested Citation: Suggested Citation
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