The Thelander 2016 CVC Compensation Survey, part of the larger 2016 Thelander-PitchBook Investment Firm Compensation Report, provides data from more than 175 corporate venturing executives representing 125 leading programmes. This fourth annual survey was conducted by compensation advisers J Thelander Consulting in partnership with data provider PitchBook, Global Corporate Venturing and with strategic guidance from corporate venturing and innovation experts Bell Mason Group (BMG).
CVC industry context and trends
Expansion and growth: In recent years, there has been tremendous acceleration in the number of companies launching corporate venture capital funds and programs. According to CVC industry tracker and media company Global Corporate Venturing, today there are more than 1,500 corporations with corporate venture programs worldwide, more than half created since 2010. Virtually every industry sector has CVC programmes, including more than 50% of the Fortune 500. And the investment and M&A deal tracker PitchBook shows data that corporates and CVCs are playing an increasingly important role in the VC investment ecosystem, accounting for more than 40% of nearly $80bn in global VC deals in 2015. With innovation and competitive urgency on the minds of C-suites and boards across the globe, CVC has become a mainstream tool in the corporate arsenal to address these challenges.
CVC practice as end-to-end implementation: CVC programmes differ from VC practices in that for the CVC, strategic value and potential commercial impact are as important as financial return on investment, if not more so. To this end, CVCs need to be able effectively to leverage parent companies’ resources, established businesses and infrastructure. For the large numbers of CVC programs formed since 2010, execution is increasingly focused on where and how CVC portfolio companies land to accelerate delivery of impact to the parent company, its present and future businesses. This may include corporate access to new venture technology innovations, new business models and adjacent businesses and applications, as well as early positions and insights in new marketplaces. Key success factors for making these programs successful – for corporate parents and portfolio companies alike – are agile and institutionalised operations and experienced professional teams that uniquely blend corporate strategy, business development, VC and entrepreneurial skillsets.
“Professionalisation” of CVC: Over the past four years, BMG and Thelander have introduced, refined, and continue to track the standardisation of CVC job descriptions and compensation structures – and now CVC career paths. This is a critical step in the evolution of CVC as a mainstream, legitimate profession in its own right, rather than a temporary revolving door or resume brightener, a path to corporate advancement. There is also increasing recognition that high-performance CVC teams need to be incentivised to stay together over time – a collection of star individuals is not sufficient to achieve ultimate CVC program goals. The quality of CVC program performance increases with the level of experience and longevity of its team, working as an increasingly efficient and powerful engine.
Building stable, long-term, professional CVC teams creates compensation and human resources (HR) challenges for corporate parents who are increasingly forced to compete externally for the right mix of talent in a pool consisting of talented internal resources as well as CVCs, VCs, private company and private equity personnel. There is inevitable friction in balancing CVC compensation and career path opportunities between established corporate HR bands and external venture and VC risk-reward structures.
2016 survey findings and implications
With this year’s CVC survey results and the evolution of professionalism of the practice it implies, key year four findings and implications include:
• Consistency in standards and compensation for high-performance team, individual job descriptions and performance criteria: There is increasing recognition that high-performance CVC teams integrate specialised, blended skillsets and that retention is as important as recruitment. In addition to the roles defined in the 2016 survey, we are beginning to see and will track new or expanded CVC roles that focus on optimising strategic landing spots – for example, a senior role that incorporates business development skills for innovation partnering and commercial piloting. Overall CVC compensation has risen slightly compared with data from previous years of the Thelander CVC compensation studies. The 2016 survey shows that CVC unit leaders earn, on average, $337,500 a year plus $150,000 in cash bonuses; with a maximum exceeding $1.5m. The survey also includes minimum, maximum and 25th and 75th percentile data for the unit leader position as well as the following roles – senior investment professional, portfolio manager or CVC unit chief finance officer (CFO), investment or program manager, analyst or associate and vice-president innovation – not to be confused with the chief innovation or strategy officer, to whom the CVC group may report, and a role this survey does not yet track.
• Talent pool cross-pollination: 80% of responding companies acknowledge going outside to recruit CVC unit leaders and senior investment professionals, the vast majority from VC, private equity (PE), corporate venturing and investment banks. At the same time, 40% report having lost a senior professional or key recruit to these same organisations. With CVCs participating in nearly 20% of venture deals, talent in the investment ecosystem is increasingly sitting side by side, creating an increasingly challenging environment for CVC individual recruiting and team retention – as well as a deeper pool of skillsets and experience. This requires corporates to understand normalisation relative CVC, VC, PE and private company executive teams’ compensation and career paths.
• CVC bonus structures are still the primary basis for competitiveness and strategic alignment of incentives with CVC performance goals– pay for performance: For the vast majority, the bonus is the preferred mechanism for competitively rewarding individual and CVC team performance. BMG and Thelander note three CVC bonus elements – corporate, individual and team.
Recently team and portfolio performance against charter – strategic and financial metrics – is factoring more prevalently in overall bonus structures. About 70% of 2016 survey respondent companies, compared with 54% in 2015, reported CVC performance as a key element in determining bonus levels. This introduces the notion of CVC team-specific bonus pools – dedicated cash or vesting restricted stock units (RSUs) – as another potentially significant retention tool.
Given that the team or portfolio performance element is crucial in competitive pay-for-performance structures, future Thelander bonus surveys will further explore the structure and use of these incentives.
Broader CVC mandate
As CVC has become a more mainstream strategic innovation activity, BMG and Thelander note a broader range of mandates aimed at maximising unit impact. Although 96% of survey participant units make minority equity investments, 11% also make majority equity investments more consistent with growth PE strategies, and 22% are also involved in innovation M&A activity. Furthermore, 35% have commercial piloting or incubation responsibilities that actively link CVC investments and parent business activities with more senior individuals in these business development roles. CVC compensation approaches will need to continue to evolve, in keeping with the expansion of the units’ mandates and individual CVC professional responsibilities.
Incentives for success
In addition to recruiting and retention, compensation structure can also signal the focus and intent of corporate executive management. Do CEOs and CFOs still view corporate venturing as an experiment or an opportunity to temporarily expose promising personnel to venture capital and innovative startups for career development? Or is corporate venture now a sufficiently critical priority to create the human resources and compensation policies required to effectively recruit and retain a team of specialised CVC personnel?
About 76% of respondents to the 2016 survey said their current title and compensation structure failed to compensate them accurately and appropriately as a CVC professional. This outcome should not come as a surprise – in 2016, less than a quarter of corporations looked to external benchmarks to determine comparables for CVC compensation and career path planning, while 49% continue to rely on existing internal corporate and HR benchmarks and banding as the primary means of framing the approach to CVC professionals’ compensation, recruitment and retention.
However, the 2016 survey shows increasing efforts are being made to define and reward individual and unit performance beyond deal sourcing, deal closing and traditional financial metrics, such as internal rate of return and exits. Close to three-quarters of respondents noted that their individual bonus structures now included some level of strategic impact metric to capture value-add to the parent corporation, for example, business unit commercial pilots, tech transfers, business unit or parent input on value-add.
Although the performance of the corporate parent continues to be an important factor in determining annual bonus, in 2016 more than half of companies reported individual and CVC team performance to be equally important factors, a change from previous years where corporate performance dominated.
About 40% of survey respondents said they were granted options or shares in their corporate parent– 80% in the form of RSUs – in addition to the 97% who received cash bonuses. BMG sees the use of RSUs as a primary means of rewarding individuals and teams, at least indirectly, with a structure that more closely emulates the risk-reward dynamic for individual and teams in the external venture world.
Only 11% of respondents reported a carried interest payment program to calculate shadow or phantom carry as a component of CVC compensation.
Financial VCs typically include carried interest – a share of investment return – as a part of senior level compensation packages. However, CVCs and corporate parents have historically experienced significant conflict in trying to arrange for carried interest in their portfolios, as this generally creates untenable organisational, operational or cultural friction within the corporate environment.
Sisyphus syndrome
A major challenge for CVC units is the frequency of senior management rotations, affecting executive sponsors for the programs. About 41% of respondents said they had experienced an executive sponsor change in their parent company in the previous three years.
BMG notes that these typical turnovers in the senior ranks of the corporation often trigger CVC program reviews, especially if there are changes in direct reporting structures. This phenomenon may prove additionally challenging for CVC programs and team retention, as change in leadership may slow the unit’s external investment momentum and progress against long-term goals, as well as require a temporary shift of time and attention for reframing and educating new leadership on program value and results.
One corporate venture veteran of more than 20 years described this as similar to the myth of Sisyphus having to roll a boulder uphill every day only to see it fall back every night. Of the companies which responded to the survey, 46% had been in place less than three years and well over half for less than five years. About 38% had been in business more than seven years.
This underlines the rapid growth in the industry over the past three years and has led to many units recruiting experienced CVC professionals from other companies, or individuals with a financial VC, PE or investment banking background to complement their internal executives.
Sources of competition for CVC investment talent
Of the respondents to the survey, 60% said more than half their investment professional team were sourced externally, with 58% recruited from VC or PE firms and investment banks and another 28% from other CVCs. At the same time 40% of respondents reported losing a senior professional or key recruit in the last year, nearly two-thirds going to VC, PE or CVC teams.
In order to compete effectively for talent, corporations must have a better understanding of and access to data relative to compensation benchmarks for the entire innovation and investment ecosystem, from which these specialised CVC professionals are recruited, hired and retained.
The internal-sourced CVC team members were seen to provide internal access and networks; with the outside hires to bring CVC deal-making and market domain expertise.
The most common CVC unit structure (42%) is to draw money from the parent company each year with a dedicated team and operating budget. Nearly 40% operate either as a completely separate entity (16%) or through a limited liability company or off the balance sheet with an annual investment budget (24%). Only 19% rely on obtaining investment funds from the parent company on an ad hoc, case-by-case basis.
To purchase the 2016 Thelander-PitchBook Investment Firm Compensation Report (CVC, VC, PE) visit http://jthelander.com/compensation-data/subscriptions/
