7 Compensation Strategies for Cash-Strapped Startups
When you’re a young company, it can be tough to recruit top talent without breaking the bank. And yet you need exceptional (read: expensive) talent in order to build from scratch. There are several strategies you can use when you can’t match market salaries: (1) Offer bonuses for meeting clearly articulated goals. (2) Cover expenses like parking, metro passes, gym memberships, and hardware before taxes. (3) Cushion or reduce your risk with a signing bonus or quarterly retention bonuses. (4) Pitch a prospective hire on the training and professional development opportunities they’ll have to grow and advance in their career at your company. (5) If possible, offer stock options. (6) Generous vacation and leave policies, flex time, remote days, and half-day Fridays in the summer can be attractive perks. (7) Consider a job title a form of compensation and offer a title that’s a step up from the employee’s last gig.
As a startup founder, I’m constantly struggling to recruit top talent without breaking the bank. We can’t always match market salaries, but we need exceptional (read: expensive) talent in order to build from scratch. How do you recruit a developer making well into six figures, or an experienced salesperson with four kids in private school? At our company, Hatch Apps, we’ve learned to get creative.
Here are some of the strategies that we’ve used, which are hopefully helpful for your business whether it’s an early-stage startup with limited funding or a more mature organization that has a restricted budget. Many of the tips below aren’t free, but they’ll help you squeeze more value out of each dollar you spend on compensation and minimize the cash at risk if your hires don’t quite work out.
Pay for performance. When we’re hiring someone who has a hard-to-match base salary at their current employer, we cushion our offer with a lucrative bonus structure, commission pay, or other performance incentives. That way, they get paid for the value they add, up to or beyond their current base salary. And it shrinks the gap between cash going out and coming in for the company since you’re often not paying out the money until the additional revenue is banked.
Performance pay isn’t just for your sales team — you can bump your marketing person’s bonus if he doubles his qualified leads, or an engineer’s salary if the product she builds goes live for customers on time. When negotiating an offer, you can discuss what’s achievable and agree on what the prospective hire should end up making if they’re as excellent as you think they are. A caveat here: Make sure incentives align with metrics over which the employee has control. Otherwise you’re setting them up for a disappointment that could lead to their resignation.
Exceptional hires are often energized by performance-based pay, especially if it means they could end up making more over time. Another benefit? Performance-based pay often scares away less competent employees who know they’re unable to deliver on what they’re promising.
Cover expenses before taxes. Parking, metro passes, gym memberships, hardware, snacks, the occasional lunch — over the course of a year, these costs add up for an employee. In our building, for example, parking alone can easily exceed $300 per month. By paying these expenses out of your corporate account (or even out of pre-tax earnings if you’re in the U.S.) you can stretch limited dollars. At Hatch Apps, we’ve covered laptops, metro passes, parking spaces — even grocery store gift cards.
In the U.S. you can often make this easy for yourself by going through your payroll provider or professional employer organization, both of which are often plugged into local transit administrations or other benefits providers. They can also help you avoid making costly mistakes on taxation of fringe benefits; you don’t want your employees to be hit with unexpected phantom income taxes for free perks.
Reduce risk in case of turnover. You can cushion or reduce your risk with a signing bonus or quarterly retention bonuses, both of which are swiped if an employee leaves the company too soon. A signing bonus can also be used to poach an executive from her current company prior to an annual bonus or ahead of a stock vesting schedule — the cash up front is a form of reimbursement for what she’ll be leaving behind. The initial outlay for you can be worth the cost savings of retaining good talent.
Invest in training and professional development. Pitch a prospective hire on the opportunities they’ll have to grow and advance in their career at your company. Successful professionals have invested in their career and want to continue to do so. We encourage our team to take time during work to develop new skills or to speak at conferences. And even though we’re a small company, we ask employees to set goals and report on professional growth during our quarterly reviews. It may cost us a few hours of productivity per month, but we’ll earn that time back as our employees leverage new skills or networks to be more efficient at their jobs.
We’ve seen other startups create a formal mentorship program where they match junior employees with senior ones, and pair senior executives with external advisers or investors. At our company we’ve connected employees to experts in their field for one-on-one coffees and instituted weekly lunch and learns where we bring in interesting people from our industry to share their experiences with the full team or teach us something new. These programs don’t have to be expensive, especially if you’re a small company, but showing that you’re invested in helping people grow can be a big draw during the recruitment process.
Leverage equity compensation or profit sharing. At startups like ours, stock options are often a major component of compensation packages. We give each incoming employee an equity grant that vests over four years with a one-year cliff, so if a new hire leaves within the first year, she’s also leaving behind her shares. When we grant these options, we explain what they might translate to in cash as the company grows, and we discuss how that employee can contribute toward increasing the stock price. Some companies instead leverage profit sharing, whereby all eligible employees take home a set proportion of cash proceeds at the end of each quarter. In both scenarios, your team does well when the company does well, thereby aligning incentives for performance.
Promote balance and flexibility. You can adopt other noncash incentives such as generous vacation and leave policies, flex time, remote days, half-day Fridays in the summer, or sabbaticals for veteran employees. At Hatch Apps, we have an unlimited vacation policy with a requirement that our team members take at least three weeks off over the course of the year. We also allow folks to work from home, and we don’t mandate set work hours. Many of these perks are especially attractive to those of us with family obligations — being able to work remotely when your kid is sick at home can dramatically simplify your life.
Reward with a job title. Some hires can be compensated with a title that’s a step up from their last gig (as long as you’re not messing with your organizational structure, or breeding jealousy among other employees). A lofty title doesn’t dent your wallet, but it’ll make a big difference for that employee when they think about next steps in their career. That said, it’s important that his job description match the moniker, or he’ll likely start looking for a role at another company with that same title and more responsibility.
Above all, what’s most important is giving your employees meaningful work and then providing them with the resources they need to be successful. A thoughtful compensation plan makes your team feel valued, and that can be done with pay, noncash incentives, and many other contributors to workplace happiness. Just remember that good pay with a couple of perks won’t stop folks from leaving an otherwise miserable job. Compensation goes hand-in-hand with corporate culture. Build a great one, and employees will be eager to join your team — and stay.
Amelia Friedman is the COO at Hatch Apps, an automated platform that enables business leaders to build apps without coding. Amelia has been recognized as a Y Combinator Fellow, a Halcyon Fellow, and a Washingtonian Tech Titan.
7 Compensation Strategies for Cash-Strapped Startups
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