Last week, I attended a Venture Capital founders event as a speaker to discuss about Compensation. The VC had gathered some data points on compensation trends from their portfolio of startups and invited me to provide an HR insight into this. After discussing the findings, questions were open to the floor. I was of course expected to share the golden formula to perfect compensation model for startup :-) Unfortunately there is no such thing! And it would be ineffective to isolate compensation as a stand-alone issue. Yet, compensation is a major worry for startup founders and CEOs but the key to this goes much beyond money and cash-flow.
When asked about this, here is what Molly Graham, former Facebook Manager, Culture & Employment Branding and COO at Quip, said:
“In my opinion, compensation isn’t something you should spend a lot of time on in the first couple years of a company. As a CEO, you should be focused on making your company successful, which in turn, makes the equity more valuable. That is what you and your employees should spend all your time on.”
How to make your company successful and the equity more valuable when you are cash poor? As a CEO, how do you bring together THE winning team when you can’t pay them market-rate salaries?
Startups face major challenges when it comes to attracting the right talents. They struggle to reach competitive market-rate salaries. Beside, working in a startup is very demanding and requires a high level of commitment.
From that angle, it is legitimate for founders and startup CEOs to worry! Luckily, there is a brighter side and there are enough startup success stories to prove it :-)
A number of employees actually dream of working for startups. Working for a startup is fun, meaningful, a fantastic learning opportunity and allows you to be a part of something bigger.
1. Who are your candidates and future employees?
Not everybody is suited for startup companies though. Quite some candidates will be attracted by the adventure and the “fun”. But there are some compromises to make:
Financial considerations: A large proportion of the active population has some financial constraints (mortgage, kids going to school, retirement plans…) and will most probably not be viable candidates for startups. Therefore focus on those with lighter constraints (new graduates, part-timers, individuals who just had a big pay-day or have already made most of their retirement plans).
Cultural considerations: Working in a startup environment is highly demanding. In terms of time and level of commitment. Your candidates need to be comfortable with constant change and long working hours. They will thrive in chaos. They are able to do more with less. They are a creative and innovative problem solvers. They are extremely driven, mature and responsible. If you cannot collect enough evidence of such behaviors in the interview process, resist the temptation -even if they have the perfect skills/experience- and do not hire.
Be very clear with your candidates as early as possible in your recruitment and pitch for your company in an attractive but realistic way. A good messaging will naturally and effectively filter out the wrong candidates. Make sure the people you hire are not looking for a cash grab. Your early hires have to be fully bought into the mission and long-term opportunity!
2. What should you take into consideration when deciding on a compensation?
Before even starting your recruitment process or deciding on an employee compensation, there are few points you need to think through and clarify.
What is your budget? What can you actually afford to pay without affecting your cash flow too hard?
Survival is the first order of business for a new company. When it comes to determining compensation you should never lose sight of your goals. Take the time to consider the big picture: How will this affect the company? Is it in line with the company long-term strategy?
What is the market rate? What is a fair compensation range for this level of responsibility?
No need for super detailed data but it is good to know where you stand compared to your market. It is not so much for the competitiveness. It is for the fairness. To ensure compensation does not become a taboo in your company. To ensure your employees do not get distracted by money worries, and focus on making the company thrive. You need to find a balance which will allow people to maintain a level of comfort that alleviates financial stress while still keeping them hungry and motivated.
What are the compensation options you can use?
Leverage all your options (Salary base, bonus, equity, benefits, etc.) in order to reach a compensation framework as close as possible from the market rate. I usually advise against pay by performance, this will be the subject of another article, but the bottom line is: it is particularly not adapted to startups (you can check this insightful articlefrom Saurabh Deshpande). Focus on hiring the right candidates with the right motivations, no need for additional monetary incentives. Equity should do the deal for the performance. And/or an end of year company bonus based on the year results and at your own discretion (so do not oversell it!). You can also be creative with Benefits (take company-supplied lunches. employer-paid membership at a local health club…). A good practice is to get all your employees around the table, ask them what matters to them and take their suggestions.
What are your company compensation and benefit guidelines?
Get easy and clear compensation principles (compensation ranges by job levels for each job family, eligibility to company stock options, possibility to trade off equity vs. cash, etc.). Reevaluate every 6 months in the early stage of your company. This will ensure consistency, equity and fair compensation practices and avoid salary disparities.
3. What about severances packages?
Another big theme I have seen with startups is the inability to let go at the right time. As a startup, your needs change extremely rapidly. You are growing and may need people with stronger leadership. The technology is changing and you need to develop new skills. Etc. But the truth is that, unless you can grow these skills within rapidly enough to meet the business needs, you will need to replace some of your workforce. And some of them will be part of the initial team which started up the company. Part of “family”. As hard as it can be, it is not a good enough reason to keep them. Have a wise conversation with them as early as possible. Most of the time they will understand. And offer decent severance packages so they have time to find something else and will still spread good words about your company.
It’s not all about money !
As a founder or startup CEO, do not overestimate the weight of compensation in your People strategy. To “make your company successful, which in turn, makes the equity more valuable” as advised by Molly, you need first to develop a strong company culture, a positive workplace and high employee satisfaction. Studies consistently show that companies culturally-minded financially perform significantly better than companies that do not invest in culture.*
So, care for your Employer brand (see the Cookie Effect) and develop a conscious company culture. If you have not consciously and clearly defined your company culture yet, block time in your calendar right now as this should now be your number one priority!