Recently, the CEO of a startup with around forty employees asked me if they should give the employees in their startup a salary raise.
Having raised substantial funding and growing quickly, their employees started asking for a salary raise.
However, the future of the startup is still unsure and they are in the pre-revenue phase.
With Hello Monday Club we help founders with strategizing in the people and culture area. Of course, compensation is important, and we believe it should support your companies strategy on different levels. Often, a traditional approach to Compensation is not suitable for startups, and a salary raise in a startup is usually not what we recommend.
So my answer, in this case as well, was, don’t implement individual, performance-based salary raises for your employees (yet). It simply doesn’t make sense at this stage.
Costs of raising a base salary
The costs of raising a base salary are more than just the cost of the raise. Depending on local laws, employer taxes, insurances, and other expenses rise with it.
Of course, compensation is important, but it is not the only thing that matters.
Joining a startup is an investment. You join for the experience, and the most important thing in a startup is working on its success.
You want employees that are willing to invest in the future, that have faith in its success and who are determined to help the startup to reach its goals.
Compensation is a strong mechanism to stimulate behavior and attitude, and so you have to use it strategically.
The base-salary needs to be sufficient, but granting higher salaries, in the end, don’t do much for motivation.
So, how can you, as a startup founder, put compensation policies in place that are helping you to attract and retain talents, and help you cultivate the desired behavior and attitude?
Alternative ways of compensation
In this situation, I recommended a combination of equity incentive plans and bonuses. Both equity and bonuses are a good way to increase engagement in the team.
Equity incentive plan
To reflect the long-term investment and raising motivation and engagement with the companies goals, an employee stock option plan is a good idea.
With such a plan, employees get granted an option to buy a certain amount of shares of the company, at a predetermined price. Since there is usually a vesting period, the employee has the opportunity of buying shares that are likely to have increased in value during the vesting period. Granting the options over the course of for example a three-year period will also be an incentive for employees to stay onboard.
There are different forms of equity incentive plans and we strongly recommend to seek legal advice before introducing equity-based incentive plans.
Another way to compensate your employees in a startup is putting team bonuses in place when certain milestones have been met. This way, you can strongly motivate the focus on reaching the goals, and with a team or company-wide bonus, you create a stronger team and increase collaboration.
For startups, I would normally advise to implement team bonuses and make individual bonuses the exception. If there is a certain position that is, for example, stand-alone and you want to reward reaching their goals that are not closely related to the overall company goals.
There is a pitfall with individual bonuses: people will expect them to be paid out even if the company as a whole didn’t meet their goals – something to be aware of. Think about if you would still want them to get their bonus or if you want to put a threshold in place.
Other forms of compensation
Of course, usually, I advise a combination of all of the above in place. Make sure to balance it out really well and find the compensation plan that fits your strategy and specific situation best. And in some cases, or the next phase of your startup, adding a performance-based individual bonus might be advisable.
Read more on this detailed article about Facebook’s Molly Graham’s approach and some frameworks she used with Facebook and Quip.
Managing expectations about salary raise
Always be transparent about your compensation plan and make sure your team has a good understanding of what they get and what it is worth, especially with the equity incentive plan.
And when hiring new people, make sure they have a proper understanding, not only of the compensation plans but also what is the strategy and motivation behind it. It is important to align expectations from the very beginning. If you get the sense that people would be expecting a salary raise in a startup, maybe working in a startup is not for them.