Comparison of Compensation Structure For Startup Employees [An Employee's Perspective]

Over the past few years I have worked with different startups and all with different compensation structures. Here’s a teardown of those structures from an employee’s perspective, based on my and few friends/colleagues experiences. This will help you decide a compensation structure that will work best for a long term employee.

1. Standard Stipend – Of the few college students who get a decent internship during the 4 years, most have little knowledge of the field they are supposed to deliver in. The startup takes a big risk in terms of management time by hiring an intern; as most students do not deliver production level stuff. If an intern ends up contributing something to the startup, no matter what stipend you give him chances are that he will think it is unjustified. Don’t dodge from your initial budget, the contract here was not about money but about making him do and learn. All you need to take care of is to be good to him, give ears to him, challenge him, and laugh with him. If you did all this right, the good interns will always stick around and come back to you. The ones that left for a higher paying job are not the ones you’d need or not the ones you deserve.

2. Below Standard Fixed Cash – If you are paying him a small fixed salary, much lower than what his counter parts are getting then you can never expect him to stick around. Hunger to learn and much needed working experience is all good motivation but at the end of the day that tickles only 1 half of the brain. The rest 50% is driven by materialistic compensation.
I have seen a lot of small software services firms do this and name it as training. The end result is a very unstable organisation. People are always looking out for a decent option. There is no one that has grown with the organisation.

3. Standard Fixed Cash – A fixed component only, is underestimating the potential of the employee. Having only fixed cash discourages workplace innovation. In start-ups specially where even the smallest feature change could turn around a stuff, it’s important to welcome ideas from all end, starting from your employees. Seeing his idea being implemented will definitely motivate the employee and is enough for the first time but from next time onwards he would know the value of his contribution and would want a “reward” for that. Even for the low-skilled employees, the reward is important.

4. Standard Fixed cash + Variable cash – The variable cash is a good motivator but the metrics you define for that is most important. In startups initial business plan and key metrics change every month. What looks like the employee’s key focus area may not even be part of your business in next few weeks. In such cases it is tiring and often an uncomfortable aspect to keep re-defining metrics for the variable cash. Also, the day the target is met, that guy is going to leave you because there is no “stickiness” component. Hard metrics based cash component is for freelancers and external agencies, not for employees.
This kind of compensation may work for sales guys who do transactional one time sales but contribute little to the product.
Product metrics is important to manage the product, not to manage the employee’s compensation.

5. Standard Fixed Cash + Variable Cash + Stocks – A stock option with a decent vesting period (3-4 yrs) is the best form of materialistic motivator. For a founder it makes sure that the employee will stick around for long enough. For the employee it assures a share in the pie. The stocks are required over and above the standard fixed cash because this element will make him slog the extra hours that his counterparts in large companies don’t.
Large cash bonuses mean a liability on your books and even if the employee is performing good, cash may not be flowing well to justify his contribution.

Suggestion – What works best?

1. Standard Fixed component – Nothing less than what someone with his kind of tag would get at a large company. By tag I mean only the education / domain / yrs. of exp. Do not account his quality of work here. If his work quality is not good, fire him; never keep an underpaid or underskilled employee.

2. Justified stocks with long term vesting – This is the component that will make him stick around. There will be times when he would be getting good offers from all over or an itch to start on his own or may be he is just pissed off and is about to take an impulsive decision to leave you; the stocks options will make him think twice.

3. Small bonus Stocks / Cash – A non fixed component is very important to keep the good guys on their toes. Instead of making it quarterly target driven, make it annual, open for a subjective discussion and based on cross employee review. Let the employee decide whether he wants cash or stocks. It’s good to define an upper cap beforehand incase of cash, for the sake of avoiding liability in your books but still keep it open ended. If he is really very good, let him have the very good share of the pie.

The point in stock option is that it clearly justifies startup’s success, “We will make it if we are together in this for long enough. No matter what we end up making, everyone will have their piece in the pie.”

What do you think? What has worked best for you?

PS: I haven’t discussed these thoughts ever earlier, please be polite in the comments. Avoid personal attacks/questions and discuss the subject.

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[Naman is a startup enthusiast and has worked with couple of Indian startups as Product Manager. He writes at The Inspire Blog]