Founders are subject to an extraordinary level of pressure as they work to establish their businesses, and often experience even more pressure as a result of rapid growth. As new ventures evolve, employees must grow in lockstep if you want them to stick around to fuel that growth. But founders dealing with factors like unpredictable revenue, securing funding and building an organizational foundation from scratch, can make determining pay scales and paths to promotion incredibly challenging.
In my time at Techstars, I've seen a lot of different philosophies and approaches to paying and promoting employees, some that worked well and others that crashed and burned quickly. Here are my top three tips for finding your company's salary sweet spot.
Set the Tone
In the early days, most founders wear the operational, financial, sales and marketing hats, often putting important decisions like deciding what their compensation philosophy will be or how they plan to pay themselves on the back-burner. In my first startup, my partner and I paid ourselves the minimum amount we needed to pay rent and buy food.
When founders begin to think about their own pay, they should really consider the larger question of what they want their compensation philosophy to reflect. Founders should ask themselves the following questions to discover their philosophy:
How do we want to sit in the market when it comes to pay scale compared to our competition?
Do we want to look at compensating employees through other benefits outside of cash comp? (equity, retirement matching, etc.)
Do we want to use compensation as a chief driver of achievement and recognition with rapid promotions or do we want to set higher barriers to entry around increases over time?
Stay Flexible, But Be Equitable
The most successful organizations ensure that compensation remains flexible yet equitable, meaning pay scales can be and are adjusted frequently to match things like cost of living in market, varying levels of experience and responsibility or even as extra incentive to protect top performing employees from being poached by the competition. That being said, founders have to start somewhere, and they should use data to establish a compensation baseline that makes sense by considering the following factors:
What do competitors offer for similar positions?
What is the average cost of living for a potential employee in the city you are looking to hire?
Where is your office located and will your employees be asked to commute or park, thereby increasing costs?
Are employees taking a risk in joining your brand new company that may require additional incentive?
Will these baseline rates allow you to increase pay at appropriate intervals and percentages?
Once you've established a benchmark, it's absolutely paramount that you ensure equity in pay between employees performing the same roles, especially when considering age and gender. Not only is equitable pay the right thing to do, but it can also be a powerful recruiting tool to help your company stand out to top talent in a competitive market.
Clear the Path to Promotion
One of the biggest things I see companies of all sizes fail to do is make the path to promotion clear to everyone. Most small companies fail to lay the groundwork and therefore suffer the inevitable challenges of dealing with employees who aren't clear on what the criteria for raises are. Employees at these organizations often choose to look for other opportunities where they can make more money creating higher turnover or spend time that they could be using to add value stressing over and negotiating salary or responsibilities with managers.
Instead of waiting for this inevitable cycle to begin, founders should take the time to set clear and realistic metrics around achievement for employees that make the path to promotion and corresponding salary increases clear and achievable. This is even more important for organizations that might not have dedicated, internal HR resources that can take these high-stress conversations off of a founder's plate.
Founders may also want to address guidelines around bonuses at this time, or if they will consider company-wide raises as the firm experiences success.
When it comes to determining compensation, the goal for any startup founder should be to create guidelines and establish benchmarks that create an environment to foster the highest levels of productivity, ingenuity and collaboration. Founders bring a great deal to the table but a team of dedicated and satisfied employees are the lifeblood that allow organizations to truly thrive. Prioritizing compensation philosophy and establishing a thoughtful, achievable path to promotion framework early on will allow founders to continue to focus on other activities that drive value and bring them closer to achieving their long-term goals.