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 compensation structure will look like. Determining how to pay employees in a startup is no simple task, but the key is to strike the right balance that enables you to compete for talent while staying within your means.
New businesses often struggle with the challenge of designing a compensation strategy that is comprehensive and competitive enough to attract top talent. While it’s not only about the money, as startups tend to offer more opportunities than larger companies, you do have to pay good wages for top performers.
Deciding where to spend finite resources can be difficult, especially for business owners who have never designed startup compensation packages before. 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. This may include incentives on top of a base salary, so that your employees do well financially as your business grows.
For instance, pay structures that promote additional work towards company objectives like bonuses and commissions can reduce fixed salary costs but still meet prospective employees’ needs. These types of incentives also keep your employees more engaged in their work.
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, flexible savings accounts (FSAs), or flexible work schedules.
Finally, keep in mind the age and experience level of your prospective hires will help guide decisions on how to pay employees in a startup. 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) plans. Ideally, you’ll want a mix of employees of all ages.
There isn’t always a culture of transparency around compensation, and it’s still a matter of taboo to openly discuss salaries. However, it shouldn’t be a black box and employees should have some sense of where they are on the compensation ladder. This is why a policy based on open salaries can avoid significant headaches in the future.
For example, if the top employee earns X, then the lower employee should earn X minus Y, based on experience and other factors. Transparent startup compensation packages can keep everyone on the same page and avoid misunderstandings or disappointment. Even if company salaries are mostly opaque, you can still communicate a percentage range and frequency of raises (and how they align with performance metrics) and cost of living increases.
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. It requires a certain balance, since you want to retain top talent by providing encouragement and security without limiting your future options.
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 prioritizing certain soft skills, too, such as:
- Emotional intelligence
- Conflict resolution
People generally aren’t prioritizing money when they take jobs at startups, and they often could make more at an established competitor. However, they believe in the idea, the project, and the people. 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.
Be Mindful About Equity
Finally, think carefully before sharing equity. 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. Some employees may not need nor want to become owners, and not all employers want to give up too much of their company.
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.
Learn How to Pay Employees in a Startup, and Beyond
Once you’ve figured out how to structure you startup compensation packages, you’ll need to find candidates who have the right skills and believe in your mission. While hiring for a startup presents unique challenges, it’s entirely doable with the right mindset and tools. Our actionable management tips and updates on hiring trends, delivered free to your inbox, can give you an assist.