“I want to pay half market rate,” the CEO, “Richard”, said to me. Richard had just raised his first round of funding. I asked Richard why?
Richard said, “I want them (the employees) to share in my risk.” Richard’s feelings are not unique. You might feel the same way.
“But 50% of the market rate seems kind of arbitrary, doesn’t it?” I responded. “There must be a better way. Plus, you have to remember that your employees are not going to get the same upside reward as you will as the founder and CEO.”
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Richard nodded his head in agreement. I hoped he understood, but I wasn’t sure.
For better or worse, I explained my compensation philosophy with Richard. I’ll share it with you now.
A. You always want to strive to compensate your employees at the market level.
Let’s look at the two extremes of bad compensation plans. The first is that you are paying well below market salaries, and the second is you are paying at the top of market salaries.
You will not attract the best people if you are paying below market compensation. Remember, top talent has many options.
You’re likely attracting mercenaries if talent only joins your company when you offer compensation at the top of the range. The problem your mercenary talent will move on when another higher offer comes along.
By the way, compensation also includes the titles you give people. If you give someone a title they don’t deserve, that’s going to come back and bite you too.
You want to be center cut. Assuming you have a great story to tell, you’ll attract great people to your team. However…
B. You may not have enough money to compensate your employees at market level when you’re just starting out.
That’s where the 18 month rule comes in. What’s the 18 month rule, you ask? Easy. The 18 month rule is you want to plan for your cash to last you at least 18 months.
In fact, I’d try and plan on having your cash last you at least 24 months. This gives you runway to make significant progress before you need to raise more money. Just as importantly, having 18 months to 24 months runway means you will not be always raising money since you want to plan on your fund raising taking you 6 months to 12 months. So…
C. Start your analysis of what to pay your employees by creating a worst case and a best case financial plan for your company.
I always like creating two financial plans for a company. The best case plan shows you what happens if you grow faster than expected. You’ll likely add more employees quicker in your best case plan, so you want to look at the effect this has on your cash.
The worst case plan is for when things go slower than you expect them to. This is usually what happens in most startups. And when things go slower it usually means that you run out of cash quicker.
You want to run your company to the plan where you run out of cash quicker. In this plan you can adjust the salaries you are paying, so your cash lasts you at least 18 to 24 months. That’s how you determine the salaries for your team. Then…
D. Assume your employees will talk with each other.
Expect your employees to share information on what their compensation is with each other. And that’s okay, and it’s to be expected.
But it’s much better that your employees decide what they want to share about their compensation than you deciding for them. It’s their decision, not yours.
And, as long as you follow this next rule, you have nothing to worry about, and that rule is…
E. You need to be consistent.
You’ve likely been in a situation where two people with almost identical skill sets were compensated completely differently in the same company. That’s a morale killer.
Yeah, someone may be pissed that they’re making a little less than someone else. Again, that’s to be expected. As long as you are paying people consistently within a range then you’re fine.
Your compensation plan is another way you build trust with your team. If your compensation plan is consistent and fair, then you will built trust with your team.
This leads to my next rule…
F. Correct your compensation mistakes before the market does.
I had two manager level employees that were just killing it. It was obvious that they were operating at a director level, if not VP level.
They were being underpaid by a considerable amount. I could have waited 9 months for their reviews to come along, but I decided to take action immediately.
I promoted them to director level (remember that titles are part of your compensation strategy) where they deserved to be, and I increased their salaries accordingly.
G. Compensation is more than just a salary.
Yes, we already spoke about titles being part of compensation. Remember that your benefits package is also part of your employees compensation too.
Having a great benefits package gives your employees great medical and dental coverage, and is a great way to convince an employee’s spouse that joining your company is the right thing to do.
And don’t stop there. Keep the employee cost of your benefits package low. Low cost plus great benefits is a winning combination for employee retention. Finally…
H. You are the last person in the company that should be paid market rate.
Years ago, I worked for a CEO, “Bob”, that put on the appearance of doing the right thing, but he always fell short. For example, the company had to reduce the salaries of its employees to reduce expenses.
The executive team took a salary cut as well, and Bob did too. However, Bob’s salary cut was the same as the executive team’s cut.
That seems fair, but it angered the rank and file employees. The company was public and Bob’s stock in the company was worth well over $100M.
Right or wrong, you are going to be judged differently because you are the CEO. To keep your employees trust, you ALWAYS have to make the biggest sacrifices. Bob never understood this. Hopefully, you will.
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