In order to attract and retain top talent, startups need to establish their compensation philosophy early on.
The following is a guest post by Kyle Holm (Partner, Pre-IPO Compensation Practice Leader at Radford) and Kelsey Owen (Director, Pre-IPO Compensation Practice at Radford).
The state of the startup market is strong.
The total number of investments venture capital firms have made to private companies in 2018 is on pace to set a five-year record, and venture capital funding is at nearly $443B since 2014, according to CB Insights data.
With unemployment rate at a rare low of 3.9% in the United States, startups will be extra stretched to hire and keep the employees they need in order to support investors’ high-growth ambitions.
Of course, startups aren’t just competing with one another for talent — they are also up against established technology players that can offer impressive starting pay packages, complete with liquid equity, benefits, and lavish perks.
While startups present prospective employees with a unique value proposition — rapid career and skills growth, potentially lucrative stock options, and/or the ability to work cross functionally — they also can’t ignore the power of a compelling pay program that reliably delivers value on an annual basis.
To have a chance in this employment market, startups need to develop a comprehensive compensation philosophy early on. Even if you’ve hired as few as five people, you probably have a good sense for where your compensation philosophy is headed, which means it’s time to start thinking about how you plan to set yourself apart — while also setting the stage for long-term consistency.
Here are the four biggest rules we encourage our early-stage clients to follow when thinking through the kind of rewards culture they want to build:
- Drop the boilerplate language; be creative and culturally aligned
- Be selective with your rewards; you can’t be everything to everyone
- Know exactly where you want to be aggressive and target pay above the market
- Make fairness and transparency a core value from day one
Now, let’s dig a little bit deeper into why each of these rules matter.
Rule #1: Drop the boilerplate language; be creative and culturally aligned
In other words, don’t be boring.
Your compensation philosophy should be a reflection of your company’s values, so put some thought into it and don’t play it too safe.
If you prioritize getting things done and shudder at the thought of good ideas being held up in bureaucracy, then you can design compensation programs that encourage people to avoid these behaviors. This might include rewarding employees who take initiative, work across functions, and/or collaborate to execute ideas.
Remember, compensation is much more than a transaction. It is a tool that can be uniquely crafted to achieve specific cultural and productivity aims. The language in your compensation philosophy and, in turn, the design of your pay programs, should align with these aims.
Rule #2: Be selective with your rewards; you can’t be everything to everyone
Like most companies, it’s likely you only have the resources to stand out in a couple of areas when it comes to your total rewards package. Choose wisely by finding rewards programs that resonate best with the type of workforce you’re trying to build.
For example, if part of your brand places an emphasis on community engagement, then offering generous benefits like charitable matching programs and time off to volunteer are great. Our latest perquisite survey finds that top culture-boosting perk technology companies offer unlimited PTO — which may seem like a fantasy to employees outside of the Silicon Valley bubble, but is increasingly common among startups.
If you’re cash strapped (and let’s face it, most startups are), then offering generous long-term incentives will keep entrepreneurial-minded employees focused on building the company. Whatever it is you’re doubling down on, ensure it’s in line with your brand and is widely communicated.
Rule #3: Know exactly where you want to be aggressive and target pay above the market
In a world where nearly every industry is now looking for job candidates that were traditionally found only in the technology sector — ie. software engineers, cyber security experts, and data scientists — many companies are creating custom salary ranges for their technical employees, establishing a higher target salary relative to other jobs functions at the same level.
In the United States, our data tells us mid-level professional product development jobs pay around 30% more on average compared to non-technical roles at the same job level. However, the dominance of technical premiums in the US is not necessarily the case in other countries — so also be aware of local market conditions if you’re planning to expand overseas.
In sum, understand the jobs that matter most to the success of your organization and make conscious trade-offs aligned to your business strategy. Don’t break the bank for every hot candidate in every business function. Have priorities and know your limits before you begin any talent acquisition process.
Rule #4: Make fairness and transparency a core value from day one
This may seem obvious to many, but it bears special mention as the way employees think about and access compensation information shifts.
Pay transparency is crucial, and anyone involved in determining how people are paid should be aware of this concept. Workers know more about their own worth and are increasingly willing to share pay levels with one another.
This means companies need to pay more attention to internal pay equity than ever before, and need to be equipped (both for legal and cultural reasons) to explain exactly why two people in similar roles at similar levels might be paid differently.
Taking an ad hoc approach to pay will create internal conflict and create major legal exposure. If you take pay fairness seriously from the get-go, you won’t be spending millions on pay equity adjustments several years from now.
Finally, remember that a compensation philosophy is a living document. Core values may stand the test of time, but as companies grow, their approach to compensation will naturally evolve.
Case in point: private companies contemplating an IPO frequently make substantial changes to their pay programs ahead of going public. The vast majority of technology companies shift to a value-based equity program focused on restricted stock vs stock options.
Further more, mergers, new products, or a change in strategy are likely to necessitate revisions to your compensation philosophy.
As a result, many companies review their compensation philosophy on an annual basis — not necessarily with the goal of making dramatic changes each year, but as a check to ensure their overall approach to compensation does not lag behind the market, and fits their current goals and trajectory.
Over time, your compensation philosophy should become a key aspect of your corporate character and mindset.