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How should CEO salary be determined?

I recently reflected on this from first principles, and this is what I arrived at:

→ First of all, I believe that the methodology for CEO pay should be simple and logical, and completely transparent to the team.

I don’t think this is common, but I believe the team deserves to know what the CEO salary is, and how we arrive at the number. The more open and transparent I can be about that, the more trust I will gain from the team that I’m being thoughtful, intentional and fair in my decisions.

I believe it’s vital that CEO pay is transparent since, in many companies, this is not the case and is a key source of distrust. CEOs are often excessively overpaid, and the gap between the lowest and highest salaries in companies can be extreme.

→ Secondly, I believe CEO pay should be the most tied to company performance of any salary in team.

The CEO salary should be closely aligned with the success of the company and the positive impact the results have on customers and the team. If the CEO is successful in their role, then the company will grow, and it will have the ability to pay higher salaries across the board.

A CEO grows over time, but that growth should translate to company performance. More so than any other role, the success of the business is the CEO’s responsibility. Whereas every other role has the concept of levels, progression, and seniority, there isn't really the concept of a junior or senior CEO or a level six, eight, or ten CEO. Of course, CEOs grow and learn over time and become more experienced. However, it doesn’t make sense to translate that into a level, when the results of the company are essentially the level you’re operating at.

→ The question then is, how should this approach be translated into a salary calculation?

What we do at Buffer, is take the market rate CEO salary at equivalent company size band, and choose a percentile that is in line with how we’re paying other roles across the team. It’s really that simple. We just look up the number, and that’s what I’m paid. Currently it's $298,958. It’s the same data we use to determine all of our salaries, and I share the methodology and my salary with the team.

In this way, the CEO salary becomes open and tied to performance. We use the same company size band for all salaries at Buffer, so the only way this factor will result in my salary to go up, is if we move up to the next company size band, apply that across the board and raise all salaries in the process.

And the percentile will always be aligned with other roles too. In essence, the system we have created means that a rising tide will lift all boats (salaries).

I shared how I approach CEO pay in my recent write up of our Salary System. If you want to read comprehensively about how our Open Salary System works, check out my comment below.

What else would you like to know about CEO pay at Buffer, or compensation in general?