Employee Compensation Packages for Startups
By: Catherine Conlan
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 though, especially for business owners who have never designed startup compensation packages before, Chin says. Here are several tips to make it easy to determine startup employee compensation — and keep your new employees happy.
Consider your Compensation Options
As an entrepreneur, you already have some experience with being flexible, so apply that same approach with your startup compensation structure.
“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.
In addition, since most small-business employers are not required to provide benefits, ask yourself whether you need to do so. “This money might be better spent on cash compensation or company culture,” Chin says.
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 in Chicago on behalf of employees and small businesses.
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 can be just as useful in attracting and retaining talent as a part of startup employee compensation.