When startups assemble their executive dream teams, compensation is often one of the top lures for talent. But to close candidates, you have to do more than offer the best cash and equity package you can afford.
To get executive compensation right, you need a thoughtful strategy that gets executives to say yes, without overspending or diluting your option pool.
A smart exec comp strategy leads to faster growth and better ability to keep top leaders longer, preventing disruption and costly turnover. How costly? A BuiltIn study revealed replacing a C-suite position can cost 213% of that person’s salary. For someone earning $200K, that’s $426K.
To keep your organization balanced and strong, follow the advice of OpenComp co-founders, Thanh Nguyen and Nancy Connery, who were also Salesforce’s first two HR leaders. You’ll avoid the following missteps.
Mistake #1: Winging it
One of the most common mistakes new companies make is hiring without a plan or letting candidates dictate their compensation. This creates a shaky foundation that won’t scale.
Companies who wing it will inevitably play catch-up by providing costly follow-on grants or restructuring their comp programs. Or in a worst case scenario, they could land in legal or media hot water.
To avoid headaches, base your compensation structure on the right data. (See Mistake #2 to learn how.) Also, consider hiring a head of people early to get compensation right from the start.
Mistake #2: Using unreliable compensation data
Basing comp on the wrong data means you could underspend or overspend for talent.
To prevent errors, avoid self-reported data, or data that’s 12 to 18 months old. Instead, find a reputable provider who can give you fresh data that’s relevant to your size, funding stage and industry.
This is especially critical for pre-IPO companies with wide ranges of maturity – a seed company can’t compare itself to a Series D.
Once you have your data, drill down to roles, experience levels and location. And be precise about your needs to get the most relevant information.
If you’re benchmarking for an emerging industry where data isn’t readily available, look at the industries or segments that your target talent comes from. Use that data to inform your plan.
Mistake #3: Lacking long-term strategies
A strong compensation program includes a plan for dilution, refreshes and additional grants, even if you won’t need it for years.
A plan for significant (and financially responsible) equity reassessment will help attract top talent and encourage them to stay. This is especially critical for founder executives who are approaching full vesting from the most recent round of financing.
Dive deeper into executive compensation
Now that you know what exec comp mistakes to avoid, here’s how to get it right.
On-demand webinar: “Exec Comp: A Fireside Chat with Salesforce’s Founding HR Team.”
Julia Dow is VP Services at OpenComp and has held compensation roles at VISA and Connery Consulting. She also writes about topics including compensation philosophy and executive compensation. Connect with her on LinkedIn here.