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How to Structure Fractional Executive Compensation: Options and Considerations

Written by

RE

Remco Livain

Initiator & Builder

Published on

9/30/2024

#cost #compensation #remuneration #pay

When working with a fractional executive, one of the key considerations is how to structure their compensation. There are various ways to approach this, each with its own benefits and drawbacks depending on your company’s needs and goals. Here’s a breakdown of some common options:

Compensation ModelDescriptionProsCons
Hourly Rate (Time Commitment)The fractional executive is paid for the hours they work, with a set hourly rate.- Simple and easy to track.
- Flexibility in adjusting hours based on current needs.		- Can become costly for longer engagements.
- May limit long-term commitment from the executive.
Monthly RetainerA fixed monthly fee is paid for a set number of hours or deliverables.- Predictable costs.
- Secures executive's time on a recurring basis.
- Stronger commitment.		- May be less flexible if the company's needs fluctuate.
- Requires clear scope definition.
Retainer + Revenue ShareCombination of a fixed retainer plus a percentage of revenue generated.- Aligns the executive’s incentives with company growth.
- Encourages performance-based results.		- Complex to implement.
- Requires clear metrics for success.
- Revenue fluctuations can impact payouts.
Equity in the CompanyThe executive receives partial ownership of the company in exchange for services.- Long-term commitment from the executive.
- Ties executive’s success to the company’s growth.		- Dilutes ownership.
- Risk of little return if the company doesn't grow.
- Difficult to unwind.
Project-Based FeeExecutive is paid a fixed fee for the completion of specific projects.- Clear, goal-oriented approach.
- Cost is known upfront.
- Good for short-term engagements.		- May not incentivize long-term involvement.
- Can lack flexibility if project scope changes.
Success FeePayment is tied to hitting specific milestones or business goals.- Strong incentive for the executive to deliver results.
- Low risk for the company if goals aren’t met.		- Can be hard to define clear success metrics.
- Not suitable for all types of projects.

Considerations for Choosing the Right Model

Each of these options offers flexibility in how you compensate a fractional executive, but the best fit will depend on your company’s growth stage, financial situation, and long-term goals.

  • If your needs are project-specific, a project-based fee might be the most practical, ensuring clear deliverables and defined costs.
  • If you're looking to build long-term relationships while keeping costs flexible, a retainer or retainer + revenue share model may provide a good balance.
  • For startups or businesses looking to secure long-term involvement and align incentives, equity might be a powerful motivator.

Remember, choosing the right compensation model isn't just about cost—it's about aligning incentives between the fractional executive and your business goals. The right structure can help ensure a productive, mutually beneficial partnership.

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