How to pay employees in a startup — think outside the box
Hiring your first employees to help build your new business means it’s time to figure out what your startup compensation structure will look like. The question is, where do you begin to help your small business compete on compensation?
“Small businesses often struggle with designing a compensation strategy that is comprehensive and competitive enough to attract top talent,” says Alice Chin, founder and CEO of Your Other Half, a human resources and operations firm that helps small businesses.
Deciding where to spend finite resources can be difficult, especially for business owners who have never designed startup compensation packages before, Chin says. Here are several tips to help you figure out how to pay employees in a startup — and keep your new employees happy.
Think outside the compensation box
As an entrepreneur, you already have some experience with being flexible, so apply that same approach as you figure out how to pay your startup employees.
“Consider structures that promote additional work towards company objectives like bonuses and commissions, which can reduce fixed salary costs but still meet prospective employees’ needs,” Chin says.
Additionally, employers with fewer than 50 full-time employees are not required to provide health insurance benefits (or pay the tax penalty for refusing to do so). While offering affordable health benefits is a good idea, and something many employees are looking for, you may find that as a startup, you just can’t afford it yet. In that case, examine other benefits that could be appealing to the startup employee, such as wellness programs or flexible work schedules.
Finally, keep in mind the age and experience level of your prospective hires. “Younger employees tend to value things like culture, perks, and work-life balance, while more experienced workers care more about traditional benefits, like 401(k),” Chin says.
There isn’t always a culture of transparency around compensation, but Pierre-Renaud Tremblay, who has sold three startups and is now CFO and co-owner of Dupray, says a policy based on open salaries can avoid significant headaches in the future.
“If the top employee earns X, then the lower employee should earn X minus Y, based on experience and other factors,” Tremblay says. Transparent startup compensation packages can keep everyone on the same page and avoid misunderstandings or disappointment, he says.
However, if you use transparent contracts, avoid guaranteeing long-term employment or substantial severance payments to anyone, because doing so can hamper innovation or change, says J. Bryan Wood, who practices employment law on behalf of employees and small businesses.
Hire for fit and mission
Take a cue from the next generation of business owners as they redefine small business management. They often prioritize soft skills and building a vibrant company culture. So, as you decide how to pay employees in a startup, consider making these your priorities, too.
Tremblay agrees with this approach. He says people generally aren’t prioritizing money when they take jobs at startups. “People work at startups because they believe in the idea, the project and the people,” he says. If you have those properly aligned, then the startup compensation package will be a smaller consideration. Instead, look for ways to spend on boosting a culture that will attract the kind of employees you’re looking for, he says.
Be mindful about equity
Finally, think carefully before sharing equity, Wood says. While it’s often seen as an easy to way to round out a startup’s salary structure, it’s not always a good fit. “Not every employee needs or wants to become an owner, and owners may not want every employee as a co-owner,” Wood says.
Instead, consider sharing profits through incentive compensation plans, which ties compensation to performance. These plans can be just as useful in attracting and retaining talent as it is a way of compensating employees when you’re struggling to get your business going.
Recruit for your startup needs
Once you’ve figured out how to pay new employees in a startup, you need to find candidates who have the right skills and believe in your mission. While recruiting for a startup presents unique challenges, it’s entirely doable with the right mindset and tools. Get expert recruiting advice and the latest in hiring trends by signing up for Monster Hiring Solutions today.