HR, Startups

Scaling HR in Startups: Getting Compensation Right

Born in basements, dorm rooms, and incubators, startups emerge as an idea that someone believes in. Founders might start building products on their own, or they bring on team members with the skills and/or time that they don’t have. It’s at this very point that getting compensation right matters because it will create the baseline structure for future hires and team retention.

Setting up a Solid Compensation Structure for Startups

With many provinces and states having already implemented pay transparency, it is more important than ever to have a solid compensation methodology from the outset. In Ontario, if Bill 149 is passed into law, employers will be required to include the expected compensation data for any publicly advertised job and refrain from asking candidates about their pay history. Without a solid compensation structure in place, companies won’t have the compensation information to put in job ads and if they post an arbitrary range to attract candidates, they will need to answer to employees whose salaries might be below what has been posted. Once pay ranges are transparent, it will no doubt shape the talent pool and impact the number and quality of applications.

When hiring, most startups primarily refer to base salary, commissions (for certain positions), and stock options when talking about compensation.

Base Salary: Establishing the Compensation Foundation

We’ll talk about base salary first as that is most common. When it comes to base salaries, founders often rely on their knowledge, network, public data, and candidate expectations to determine new hire salaries. The downfall with this approach is that it lacks verified data and consistency. This sets the company up for challenges down the road due to inconsistencies and pay gaps amongst team members.  This issue isn’t only created at the time of hire, sometimes it is created when doing annual increases as many companies don’t have a sound methodology around pay increases. We’ve seen many startups lose long-tenured and valuable employees because of a better offer they received elsewhere or due to perceived pay inequity. While creating a compensation structure for a handful of people may not seem necessary, it is important. Companies should always be using verified market data to determine base pay. A review should be done annually to ensure your team is still within the market range.

Commissions: Motivating your Sales and Customer Success Teams

Commissions are often provided to sales and customer success team members in startups. The commission rate is really dependent upon many different factors including the stage of the company, product, pricing, industry, etc. The important thing to keep in mind when determining the commission structure is ensuring that it is equitable, quotas are realistic, and you are motivating the team to achieve the Company’s goals. For example, if a company strives to sign-up more recurring revenue than professional services revenue, you want to ensure that your commission structure properly incentivizes that and creates alignment.

Stock Options: Aligning the Startup Team’s Long-Term Objectives

As we all know, stock options make up an important part of early-stage startup compensation. Options will often make up for lower salaries in early startups and helps secure early hires by giving them a stake in the business. Determining the number of options to give to a new employee is very subjective depending on the stage of the company and level of the individual being hired. For example, a CTO joining a pre-seed company will normally get a significantly higher ownership percentage than a CTO joining a series D company. We rarely see founders properly plan their stock option issuances. What we would normally recommend is to create an option issuance matrix that you can use to determine the number of options to issue to each position category in the company. For example, the option issuance range for a new level 1 engineer may be 5,000 – 7,500 options, whereas the option issuance for a new level 1 accountant may be 3,000 – 4,000 options. Once you have created that matrix, you should then take the figures in the option issuance matrix you created and create an option issuance forecast for the next couple of years (or at least until the next raise) based on everyone you are planning to hire (including advisors). This should also include option top-ups for existing employees. This will tell you whether you have enough options in the options pool to equitably issue the number of options planned.

Benefits: Supporting Employee Wellness

Benefits are also commonly a part of your team compensation package. Benefits give families the support they need for common health services, a disability safety net, and even life insurance. Many startups take a ‘set it and forget it’ approach with benefits. This normally results in benefits package offering that is not aligned with your team needs. Consider the age, location, marital status, and dependants of your team when designing your benefits plan. Companies should closely look at the usage of their benefits offered each year at renewal to ensure they are meeting the team’s needs. If there is a particular benefit that is not being utilized, find out why and see whether you should continue to offer it.

Bonuses: Incentivizing the Team’s Performance

Some startups also offer bonus packages to its team, although we will rarely see them offered in pre-Series B companies. Bonuses can be used to incentivize team members or provide higher compensation only if the company circumstances allow. While bonuses can be tailored to individuals, it is recommended that you create consistencies among levels and roles to ensure fairness and prevent issues down the road. It is important to ensure everybody understands the criteria to achieve their bonus and how they are tracking towards it throughout the year.

Beyond Compensation Surveys: Which Compensation Levers to Pull

It’s important for founders to remember that typically candidates who are interested in startups are looking for more than just compensation, they are looking to be a part of something cool and innovative. They often buck the idea of a big corporate culture with a lot of structure and rules, however, that doesn’t mean they are willing to give up all frills and don’t care about fairness.

Compensation surveys are available specifically for startups. Having access to these surveys ensures that you are paying competitively with companies who are similar to yours, allows you to benchmark new roles and can also help you decide where to hire. They can tell you if similar companies are offering bonuses and how much they are giving and what option grants look like for different levels. What these surveys won’t do is tell you how to implement pay ranges, bonus plans, and stock option grants or what to pay individuals specifically. In other words, they can provide information to help you make decisions, but they won’t make the decision or framework for you.

The BrightIron team is here to support you if you’re interested in learning more about total compensation, implementing a salary structure and helping you understand the risks of on-the-fly compensation decisions. Reach out to our team and see what we can do to help support your business!