Getting Compensation Right in Startups

Setting salaries, bonus levels and equity grants can be a hard task. Getting it right, avoiding misperceptions and keeping motivation and retention where they need to be, are the art and science of good HR.

Compensation is arguably a little more about the future than about the present, so building a clear, motivational path ahead for each employee, ‘brick by brick’ as Conrad put it, is something all startups would like to achieve. Using a reputable salary survey like the VCECS (VC Executive Compensation Survey) as a model – there are others – we can see how best to use the data available to check we’re on the right path.

Your place in the market

Before diving into data, it pays to ask yourself some basic questions. Questions such as, “where are we hiring people from?” and “where are we losing people to?” This immediately gives you some sense of your place in the market. An ecology map if you like. It helps you set your ambition in line with the percentile salary bracket you’re offering. For example, in a previous HR role, I identified that we were attempting to attract a number of people from Google. In order to maintain this flow, we needed to set our salaries and total compensation relatively high, towards the 90th percentile. Our vision of what we wanted to achieve, the calibre of people we would need to achieve it and what that would cost, was made clear thanks to the salary survey data.

Title inflation

The next question to ask might be, “how come we’re a small company made up entirely of ‘Directors’?” Title inflation is notorious amongst startups, for understandable reasons. The early staff set are a close-knit group and flat title structures make for a strong team ethic. Likewise, new hires will expect – and be lured by – titles that reflect their personal contribution, particularly if entry salaries are low. Further downstream however, lies a problem: Directors, Executive Vice Presidents and Chiefs of Staff aplenty, with little differentiation between them. A Chief of Staff who is in reality an Office Manager, for example, won’t take kindly to having their title revoked 18 months in. And the occurrence of titles such as ‘Data Ninjas’ is an understandable reaction to the problem. (By the way, did you think the title Ninja would encourage more or less female applicants? Just don’t!)

A critical question

The next question is a hard one, but applied early, can mitigate the title inflation problem, as well as correctly gauging compensation levels: “how critical is this role to the company?” Focusing on the role, as much as the person filling it, helps keep the decision-making precise and clear. Criticality to the company is, and should always be, the main driver of any compensation decision. Backed by data, these decisions will be powerful and clean.

Conrad added a useful caveat at this stage: “don’t let the data put you at risk of losing a key hire.” This speaks more to the individual, than the role she or he is filling. Data is a powerfully useful tool, but it need not dictate terms. Conrad put it another way: “data’s a barometer not a dictionary.”

The cash equity mix

Getting the cash equity mix right is where the art and science of compensation combine. There lies a delicate balance between affordability and being competitive. Understanding the gap between your compensation packages and the broader labour market is crucial to success.

To generalise, the cash side of things will follow regional trends, whereas equity tends to be more agnostic. However, there is more attention paid to equity value these days, due to companies staying private for longer.

Being aware that equity may no longer hold its retention value after three or four years (fully vested) is important – even in the early stages of recruitment, particularly for company-critical roles. Refresh equity grants are powerful tools at your disposal. These are typically four-year grants which begin vesting after the initial grant has fully vested. As Conrad said, it’s a process of laying bricks down in front of an employee, showing them a clear path ahead (and motivation) to stay with the company. A pay and equity strategy can be methodically developed against competitive data based on your labour market. The data also allows you to ensure affordability by costing out the budget for cash and equity needed to implement the plan. Refresher grants should be used regularly, within a mindset that sees the future potential of more junior employees as well as their current, visible performance. The quiet one in the corner, with the right training and leadership, may be tomorrow’s critical team player.

One extra note to add here is the reality of the pain point many growing startups face as they mature. Namely, the point at which the “all things equal” ethos may have to be abandoned with equity being reallocated to the more critical talent. It can cause cultural earthquakes for founders and early employees alike, but for many, it is an unavoidable shift that, once crossed, releases the company’s full ambition.

Transparency or consistency?

The issue of transparency raises its head around this time of a company’s development. In the early stages it’s relatively easy to be open and ‘equal’. Later on, with bigger scale, the issue of company-criticality – creating inconsistency in compensation structures – inevitably muddies the waters.

In my view, the internal grapevine is always active. Some people can and will talk openly about base salaries and equity and there’s very little can be done about that. One way to keep the balance of transparency and consistency is to communicate – backed by the data – the band within which a particular role is rewarded, “from here to here”. It’s then clear that there is a conscious but flexible consistency, within which people are appropriately valued.

The right decisions

Salary surveys give us the foundation from which to make rational, and sometimes emotional, decisions. Ultimately, we’re dealing with people, so the more we’re familiar with the data and how to use it, the better we’re going to nurture our most precious resources: the company’s people.