Hooked on Startup Comp - From Chaos to Clarity - Issue 32
"Show me the money!" - Jerry Maguire
In the early hiring days at your startup, there's a seductive allure to wing it when it comes to compensation. You bend a little here, and bend a little there, and don't give much thought to the downstream impacts of your comp decisions — you just need to get people hired. And maybe this seems fine at first, but the longer you take to button up your comp strategy, the more you set yourself up for bigger headaches that come with growth.
What's going on?
When it comes to selling and closing candidates, there's a common misconception that it's all about the Benjamins, baby! And while money is a real part of every hiring equation, the fear of losing great talent causes many founders to throw caution to the wind and make any exception necessary to fill a leadership hiring gap. This is especially common at early-stage when you think you need to justify extremes to compete. You tell yourself you're too small for structure and opt for the "worry later" approach because business growth depends on hiring. Besides, you don't have time to answer bigger philosophical questions about compensation, how a comp philosophy aligns with your culture, or influences who you recruit. But delays in comp clarity will inevitably turn into a messy situation as you double and triple in size, leading to a whole host of issues to unravel. Pay inequities, confusion, resentment, and compensation inflation — to name a few — not to mention an inability to scale. And everyone talks about compensation whether you're transparent about it or not. All these things undermine your ability to retain talent and attract your next leaders. Worst of all, you're starting to realize no one really understands how compensation decisions are made — including you.
Why does it matter?
Whether you realize it or not, your ability to articulate your comp philosophy in a tight, transparent, and consumable way is a big draw for leaders seeking their next opportunity. When it comes to comp, intentionality breeds leadership confidence that you, as the founder, are taking the necessary steps to ensure the sustainability of the business. Startups are hard enough without the added stress and confusion of ad hoc pay practices. And make no mistake, leaders you recruit are doing their due diligence to understand how much dysfunction they're signing up for. While it's normal to have varying levels of chaos at any startup, there's a much higher likelihood that leaders will choose to follow founders who show intention from the start — especially on matters impacting their livelihood. With a dialed-in comp philosophy, you can tackle early and ongoing comp conversations with clarity and conviction so candidates can understand their opportunity upside and make a conscious decision to opt in. One vital step of many on their journey to establish a two-way fit at your startup.
What do others think?
"Early-stage founders often approach compensation on an ad hoc basis, addressing pay individual by individual. But without a thoughtful total rewards strategy, that inevitably leads to headaches as the company grows and scales. Intentionality in compensation is not just about the money; it's about attracting and retaining talent, fostering transparency, and ensuring long-term sustainability." – Kyle Holm, Vice President, Total Rewards Advisory at Sequoia
What do we think?
Be diligent. As the founder, you are your startup's de facto comp expert. Until you have someone in your company focused on compensation/rewards, it is your role to set the tone and reinforce a consistent practice for how you compensate your employees. And even with a solid philosophy, comp is not something you can pay attention to once and expect everything will fall into place. Comp requires ongoing evaluation, review, and feedback from peers, advisors, and investors. Like it or not, your team will bring baggage from mismanaged or inequitable pay practices they've experienced at other companies. Comp is the last thing you need people churning on at your startup. The easiest way to eliminate friction is by introducing frameworks that make compensation matters as fair, transparent, and formulaic as possible.
What do YOU think?
Take Action
How you pay impacts who you can hire. How you communicate and execute your pay practices impacts who you can hire and ultimately retain. Pay impacts culture, values, and productivity. Establish and communicate your compensation philosophy from day one so your employees understand the rules and the rewards. Molly Graham wrote a fantastic overview in her Substack article, Compensation for Startups: Designing Your Compensation Philosophy, jam-packed with food for thought. The bottom section, titled "Design Decisions for Your Compensation Philosophy," provides an excellent framework to work through to create your comp philosophy. Her post on leveling, this public framework, and her article on taking steps to implement your compensation system provide her perspective in a straightforward, consumable way. Worth a read!
Align with Growth Stages: No startup will build a one-and-done comp philosophy. Consider how your philosophy aligns with each growth stage and make sure it's flexible and responsive to macro forces, market changes over time, and how they impact the way you position your total rewards.
Promote Transparency: It's 2023, folks! If you haven't already worked to implement transparent pay practices — even early stage or under 15 employees — the time is now. It's not just about abiding by the laws. Being transparent can provide a competitive advantage. Even when pay is below market average, it's important to share the total rewards story, including equity and other benefits, to attract potential candidates. While your compensation philosophy may have been created by you, it can't end with you. Anyone involved in the interview process should understand and be able to fully articulate your startup's comp philosophy to all candidates, regardless of level. Another reason simplicity is so important.
Tools, Resources, Events
Aspiring for Intelligence —> Podcast Drop: A Conversation with Jeff Huber
Carta → What is a Compensation Philosophy?
Susan Alban —> How to be a fair-pay CEO
Josh Melick —> A Formula for Sizing Employee Option Grants — How Much Equity to Give
Matt Cooper —> A No B.S. Guide to Startup Stock Option Grants