Startup leaders are asking if they should change their plans around spending, runway, hiring, and funding based on the current state of public markets. According to YCombinator and Sequoia last week, growing businesses should hunker down and make sure they have 24 to 36 months of runway. They say it’s time to plan for the worst.
That likely means pausing non-essential hiring, assessing vendors, raising the bar for what’s considered acceptable spend, and sticking to pay ranges instead of giving yourself a lot of wiggle room, like we’ve seen in the Great Reshuffle.
Since compensation is one of a startups' largest sources of spend, it is a critical area to model, understand, and make data-driven decisions that are clearly communicated to align the entire organization. This blog outlines three absolutely critical cash conservation and management tools that every startup needs in its operational toolkit.
Reliable comp data, pay ranges & headcount plans - what every startup needs right now
Three steps are foundational to creating a financial model that weathers economic uncertainty.
1. Get market-based, reliable compensation data. Headcount planning is elaborate. Generally, finance, talent and HR are working with different numbers, so they need a single source of shared compensation information that’s based on reliable, relevant, competitive sources. Traditional sources are none of these things because they are:
- Stale by 12-24 months. In our current environment, pay data must be no more than a quarter old.
- Unreliable and inaccurate because the information is employee-reported, not employer reported.
- Irrelevant because traditional surveys compare job roles based on titles only — without verifying if it’s actually the same role. A sales manager at a Fortune 500 is a very different job than the same title at a Series A company.
2. Develop pay ranges. Pay ranges are only accurate when you use the right data to inform them. They have three components: a low point, high point, and midpoint. With this information, pay ranges give headcount planning the accuracy and predictability that’s needed to make data-driven decisions about staffing.
Pay ranges also help companies adhere to pay transparency legislation in 10 states (and counting), as well as continue operationalizing pay equity, a board-level priority. If businesses aren’t careful, they can inadvertently impact underrepresented populations as they move into conservation mode.
3. Hone a disciplined headcount plan. Only with pay ranges informed by the right data can you model out hiring scenarios, assess how different merit cycles and hiring plans impact burn, and choose from your options. The headcount plan is the financial plan in most companies.
Look at the tradeoffs. Determine the best way to effectively scale up (or down). Since compensation is such a large portion of spend, accurate hiring plans built on accurate pay ranges deliver needed cash conservation and runway.
Once you model, revisit your plans every month. Operationalize it. Work it into your close. Depending on the deviation in how you close the month, it should inform future headcount for the following month and quarter.
While we're all waiting to see what happens with the public markets, it’s not a bad idea to prioritize getting back to operating fundamentals: hiring plan re-evaluation, burn and runway costing, and sticking to your comp ranges.
Take action today
Data-driven decisions are key to doing the best we know how to do today. If this is a true recession, then we will decide what happens next.
OpenComp’s compensation intelligence platform is built for startups to do all of these things. Sign up for free today.