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“Salary is a necessary evil,” and other thoughts on startup pay

In his weekly column, Maynard Webb says startups should offer decent salaries, but the real payoff should come from variable compensation.

“Salary is a necessary evil,” and other thoughts on startup pay
[Source illustration: LysenkoAlexander/iStock]

Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, offers candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at dearfounder@fastcompany.com.

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Q. How do I think about compensation for people I’m hiring at my startup?

—Founder of an early-stage startup

Dear Founder,

When I think about compensation, I’m looking for a way to motivate and reward folks by achieving the organization’s long-term purpose. Startups are a high-risk, high-reward opportunity, and I like to see offers reflect that. I want to put a model in place that has everyone aligned on the goals and pushing hard for success.

For startups, cash is king. Founders must preserve the cash they have to invest in the company. Often that means that the first employees at an early-stage startup are going to receive a base salary that’s less than what they could make at a big company, but they also should receive equity that makes the potential upside much greater for significant wealth accumulation.

I know this sounds a little unusual, but I see salary as a necessary evil. People need to be given a salary so they can have enough money to pay their bills and live their life. And employers need to offer enough so that they’re competitive. (That said, don’t compare yourself to bigger companies—as mentioned above, you’ll be offering a lower cash package but giving them a higher upside.) For an employer, it’s important to recognize that someone’s salary will never go down; it only goes up. In that way it becomes like an entitlement—most people expect their base to increase every year, even if it is in a small fashion. However, that incremental amount won’t really do much; no one really changes the direction of their family legacy on salary alone. Even outside the world of startups (think about finance or sports), people have pay structures that include not just base salaries but bonuses tied to performance—that’s the vehicle that has the most potential to make a difference.

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My goal is to change the trajectory of people’s lives. I like to see all employees be able to participate in some upside. Offering everyone equity is a great way to get your team aligned with what is good for the enterprise. I try to structure a variable compensation opportunity in addition to a fixed comp. I think of the package as a layer cake:

Salary: I like to see everyone—employees included—taking a risk, but you want to pay them enough so they will be committed fully to the company and not have to take another job or live off of savings. That’s where a decent salary comes in. However, remember that the only thing salary does is let you hire the person; it doesn’t incentivize outperformance. In that way, it doesn’t carry much bang for the buck. And whatever initial excitement someone gets from a raise, it doesn’t end up making a huge difference after taxes—it goes quickly.

Variable comp: This should be performance-based, determined by company and individual goals. The clearest example of individual goals is how salespeople get compensated based on achieving their quota, and they often can do much better if they blow those quotas away. Broad-based bonuses for the whole company tied to achieving the organization’s goals are a good way to align people on objectives and also measure how the company is doing on them. But remember to have some fidelity in the process—if these bonuses always pay out at 100%, they become expectations, and you’ve just turned your variable comp into salary.

Stock in the form of options or RSUs: The value of this goes up when the company’s value goes up—and this will have the most appreciation and be the most meaningful over time if the company is successful. Take Okta, that stock is up more than 10 times since its IPO. Of course, it needs to be said that these types of grants will only be worth anything if the company is successful. The good news is this is a great incentive that will rally everyone around the same idea: When the company succeeds, we all succeed.

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