By Julia Dow, Jun 23, 2022 7:00:00 AM
Building a startup requires having the right employee compensation strategy. After all, when you’re in startup mode, you not only need to attract top talent and retain employees to help the company grow, but also need to do so within the context of available cash and equity. That equation shifts in tandem with the economic and competitive environment.
When you build a compensation program that incorporates nuances associated with the challenges and opportunities unique to startups, you can pay your employees competitively while making the best use of your market data and company funding.
In this post, you will learn about the critical elements of startup compensation and how the OpenComp startup compensation tool can help you deliver well-crafted comp packages resulting in smarter, more sustainable business operations ideal for these uncertain economic times.
Typical elements of a startup compensation package
You already know that several variables affect employee compensation, including external market factors and internal factors such as job level, experience, and tenure. But the stage of a company’s growth also impacts employee compensation.
In large, mature organizations, cash may comprise a more sizable portion of an employee’s compensation package. But in many startups, startup equity may represent a larger portion than salaries and bonuses, particularly in the early months and years before the company generates more cash flow. During times of economic uncertainty, emphasizing equity may be in your best interest.
Nevertheless, each of the following components is critical to the overall startup comp package:
- Startup salary
- Cash incentives such as bonuses, commissions, and other performance-based payouts
- Equity, including stock options and restricted stock awards
- Benefits and perks, including traditional benefits, stipends, and reimbursements for items such as remote office setup and wellness support
Key considerations for building a startup compensation program
Every startup is different. However, there are some key actions your company should take to get early-stage startup compensation right. Once you have established a solid framework for paying employees early on, it will be much easier to update your comp practices as your company grows.
Here are the steps you need to take to get started:
Develop a compensation philosophy.
Your compensation philosophy will act as the guiding force for all of your compensation decisions. Crafting a thoughtful comp philosophy will enable you to build consistency in pay practices as your company grows. For example, your comp philosophy will explain the balance of equity to cash in comp packages and your goals for paying employees relative to the market.
Understand the competitive market.
Candidates and employees often have many options for where they can work, so it’s critical to have a current view of market compensation for company positions. But instead of getting benchmark salary data off the internet or from a year-old salary survey, obtain reliable benchmark data based on other startup and early-stage companies.
Once you understand the competitive market for employee roles, you can go back to your compensation philosophy to determine if your goals for competitive pay are affordable based on your level of funding and available cash.
Create pay structures.
Pay structures—such as pay ranges—help standardize your compensation practices and build equity across similar positions. For example, you can develop pay ranges to help differentiate between packages for senior executives and levels of employees across every function.
It’s also a good idea to communicate pay ranges to employees and candidates as part of an overall strategy to improve pay transparency. Recent Glassdoor research revealed that 63 percent of surveyed employees prefer to work at a company that discloses pay information over one that does not.
Establish an equity pool and determine equity ranges.
Startup equity compensation is particularly valuable because it allows employees to establish ownership at the “ground level.” As the company grows, employees also benefit, sometimes increasing their earning potential above what they might earn in a non-startup environment.
However, to prevent over diluting your equity pool, you need to determine the size of awards available to employees at different levels. By being thoughtful about how you will make awards from the pool, you can maintain the value of equity as you continue to hire and promote.
The OpenComp startup compensation tool: supporting compensation structure for startups
When your company is in startup mode, every hire, promotion, and salary increase can significantly impact your budget, burn rate, and equity pool. Therefore, you can’t make compensation decisions without access to the right data to keep you on track with your cash and runway goals.
Startups face unique compensation challenges and must approach compensation differently than older and larger organizations. That’s why OpenComp’s compensation software offers specific data and tools designed to help growing companies pay employees with maximum impact.
Here are just a few of the key capabilities you can expect from the OpenComp startup compensation tool:
- Compensation intelligence and reliable market analysis: These will help you make data-based compensation decisions. With compensation benchmarking based on similar companies, you have the data you need to build comp packages aligned with your compensation philosophy.
- Compensation planning tools: These will help you model compensation, hiring, and promotion scenarios and their impact on your budget and equity pool.
- Data and analytics: These enable easier evaluation of comp packages against your DEI metrics and pay equity goals.
Startup compensation tips to conserve cash and extend runway
It’s no secret that managing a startup is one of the most difficult things to do in business.
However, despite the risks, scaling a startup can be highly rewarding for founders, investors, and employees alike. This journey often involves seasons of scaling up and seasons of scaling down.
To ensure you continue to manage what is likely your company’s largest expense—compensation—take the following actions to strengthen your compensation program as you grow:
Conduct compensation benchmarking.
Although your startup may have less available cash at the outset, as cash flow increases, you’ll need to routinely compare employee compensation to the market. For example, every time you raise a new round of funding, it will likely be necessary to give employees a salary increase to keep their pay competitive.
By benchmarking employee compensation compared to companies at a similar stage as yours, you can have the information you need to set pay and remain competitive over time.
Keep your pay program transparent.
In a World at Work survey, 93 percent of companies said they had a compensation philosophy, but only 22 percent said most or all of their employees understood it. As your company grows, employees must have an understanding of your compensation strategy so that they don’t think that everyone has their own special deal.
You can improve transparency by communicating your compensation philosophy to employees and sharing pay ranges with candidates and employees. As a result, they will understand your company’s approach to pay and their opportunity for compensation growth over time.
Help employees understand the value of equity.
Without a full explanation of the long-term value of equity, employees may be likely to underestimate its importance to their overall compensation. It’s easy to focus more on cash because of its immediate value. By educating employees about their equity awards, you can help them take a more balanced view of equity and other non-cash compensation. In addition to providing an overview of your equity program during the hiring process, you can also offer resources and modeling tools to help employees see how the value of their equity could grow over time.
Get startup compensation right
Compensating employees in a startup is too important to base your pay practices on guesswork and incomplete market data. Instead, you need a startup compensation tool that delivers the data essential for compensation benchmarking, hiring planning, burn modeling, and more.
Whether your company is early-stage or about to launch an IPO, OpenComp has the market data and analysis you need to build a compensation program that can provide increased financial security and overall growth. For additional insights, check out the High-Growth Guide to Compensation Benchmarking.
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.