Despite a booming VC market in 2021 and early 2022, executives are now operating in a challenging climate marked by record inflation, a war in Europe, a bear market, and declining VC funding. The 2023 Pavilion Executive Compensation Report highlights the challenges faced by revenue leaders and executives in a rapidly changing economy.
With over 75% of Pavilion’s Executive Members reporting that their company missed its revenue target in 2022 and only 20% saying those targets have been scaled down in 2023, executives are faced with the threat of missing their on-target earnings (OTE) due to unrealistic targets. But there are signs that point to more positive and risk-stable outcomes for executive compensation.
Negotiation periods are getting longer
The report found that executives who negotiated equity terms during the 2021 boom now face the threat of downsized valuations as the economy cools. This leaves executives caught between devalued stock options and unattainable targets, with cash becoming a priority in 2023.
However, there are clear signs of improved negotiation confidence and proficiency among executives. The average length of compensation negotiation has increased steadily over the past three years, and executives are securing longer exercise periods for stock options, which is a critical protection as the market fluctuates in the short term. The rate of executives with pre-negotiated severance has also topped 30% for the first time since Pavilion began reporting on this metric, reflecting a trend towards prioritizing risk mitigation terms in compensation packages.
“Severance gives you the financial cover to find a comparable job based on seniority level and the state of the market,” says Asad Zaman, CEO of Sales Talent Agency. “In previous years, we’ve been in a market hot enough that the company could argue you’ll find a job relatively quickly. Three months severance might have been enough. We might not be in that market anymore. While it’s still a competitive market, demand is down for all sorts of people. Negotiate for severance accordingly.”
Due diligence is more important than ever
Executives should focus on delivering sustainable, profitable growth and conducting their due diligence to be better prepared to navigate uncertainty in 2023. This includes prioritizing base salary over bonuses and equity options and understanding the targets for which they will be responsible. In the face of continuing layoffs, executives should also prioritize severance, which provides critical stability during a tumultuous year.
The report also highlights the importance of identifying companies chasing unsustainable growth and weighing that risk when deciding to take on a new role. Executives can use the “rule of 40” and ask for a view of the forecast and budget for the year during negotiations to determine if a company is prioritizing growth over profit.
“My recommendation to executives in negotiations is to understand the math,” says Pavilion founder and CEO, Sam Jacobs. “Get to know margin operating expenses beyond top line revenue growth. You need to make sure the compensation you’re requesting works with the unit economics of the business. If you’re willing to have lower OTE and a more rational cash compensation structure relative to the growth of the business, you’re more likely to stick around.”
By prioritizing risk mitigation, focusing on sustainable growth, and conducting due diligence, executives can better prepare themselves for uncertainty and protect their earnings. Download the 2023 Pavilion Executive Compensation Report for more insights in compensation and revenue performance trends, plus expert advice and industry insights.