One of the main objectives of companies in general, and startups in particular, is to navigate the company to a path of rapid growth that will enhance its profits and establish its financial stability. Since the development of products is based primarily on the human factor, the recruitment of talented employees and enhancing their bonding with the company are crucial elements on the road to the company's success. As in any field, companies, including startups, also seek to compensate their employees in order to bring out the best in them: industriousness, identification, loyalty, etc. The special nature of start-ups in the high tech industry sheds light on the unique trend created over the years to compensate employees in a different manner from that customary in other industries. In order to understand the different nature of such compensation, it is necessary to understand the unique environment in which startups operate, which creates different emphases in the compensation structure:
Startups are usually not as cash-affluent as are established companies, and therefore find it hard to compensate managers at the levels customary in established companies. They make up for this by the generous granting of options in the company. Such options could turn out to be highly valuable if they succeed maybe even more so than in established companies. Furthermore, by linking the remuneration with a salary and options that are vested over a period of time, the companies associate their success with the employee's remuneration to one degree or another, thus increasing his or her involvement and identification with the company.
High tech employees are relatively well-educated and have high expectations. Therefore, it is natural for startups to give their employees generous social benefits and other indirect benefits, often much more than in more mature companies.
Methods of Employee Compensation
The forms of compensation are numerous and diverse. The principal ones are:
Cash This includes salaries, bonuses, social benefits, managers' insurance, and pension funds.
Stocks and options This is the customary form of compensation in growing companies, as discussed in further detail below.
Various benefits These include flexible hours, partial financing of tuition, participation in the cost of kindergartens and summer camps for children, and often even the organization and management of such kindergartens and summer camps. In addition, most companies organize company outings and various services for employees such as messenger services and in-house gyms to save them from daily hassles. In many cases, the direct value of the benefits to the employees is higher than their cost to the employer.
Managers' insurance, pension funds allocations, and budgetary pension funds are customary components of employee compensation packages. Clearly, every such plan needs to be adapted to the worker's individual level of income, education, and age, as well as to the company's business condition. Such plans usually include the following components: life insurance (payment in case of the insured's death), compensation for occupational disability, pension annuities, and health insurance.
The contributions of employers and employees to pension funds are governed by regulations. Such regulations limit the amount of contributions employers can make without imposing a tax liability on the employees. In the United States, the vast majority of contributions defer the payment of the tax, but cannot provide a full tax exemption.
Non-monetary benefits These include promotions, improved work environments, and commendations.
Considerations in Planning Compensation Packages
In recent years, compensation packages have included many components which employers and employees need to take into consideration. Many startups grapple for a long time with the structure of the salary they will offer employees. Generally speaking, compensation is constructed of three components: a fixed salary, short-term variable compensation, and long-term compensation.
Salary The first element includes the employee's contractual salary and is independent of other factors. In most cases, the fixed salary includes two elements: the base pay, on which social benefits are paid, and the element of complementary salary, for which social benefits may not be paid (for instance, global overtime pay).
Variable compensation The second element is constructed of remuneration that is related to two elements: the amount of work invested by an employee (for instance, overtime pay) and the achievement of goals. The manner of calculation of the payment may be agreed upon in advance and may be included in the employment or other contract, or it may be concealed from the employee, who would be informed only of the amount of the compensation and not of how it was reached.
Such bonuses may be affected by the volume of sales or production, customer satisfaction, etc. Obviously, the higher the employee's influence on the business results of the company or on the business unit, the more intimately will the employer want to tie the employee's compensation to the results. In other words, the ratio of the variable compensation to the fixed pay will be higher. Various components of the bonus may be based on the performance of the division or on the performance of the company as a whole. Mostly, it will be based on a combination of the performance of the company and the performance of the business unit (for a discussion on how to determine such a combination, see the later section on performance-based compensation).
In investment banks, for example, the annual bonus that is based on the results of the business unit may be up to ten times higher than the fixed-pay component. In high tech companies, it is not uncommon to find sales personnel whose sales commission is up to three times that of their base pay. In certain cases, the variable compensation is also given in the form of long-term compensation, as specified below. For example, the customary range for bonuses for CEOs and VPs in high tech companies can reach 50% of the total pay.
Long-term compensation The long-term compensation components are based primarily on payment in shares or in options, but may also include monetary compensation, as described below.
A correct balance between fixed pay, short-term variable compensation, and long-term compensation involves an analysis of the organization's overall objectives and depends on the status of salaries in the relevant field of activity and the startup's organizational structure. In the past, many startups belittled the importance of the structure of compensation. Now, many use outside advisors to plan the structure of their employees' compensation. For instance, complex issues arise when the startup is part of a large organization and some of its employees move to it from the larger organization. Other complex issues arise when the employees of the organization are located in different countries, and the comparison of the employees' salaries has to take into account differences in taxation and the cost of living.
Another important element in determining the compensation is matching the alternative compensation that the employee could receive elsewhere. Obviously, it is difficult to accurately assess the alternatives available to an employee, but they can be estimated by examining the compensation given to employees holding similar positions with comparable experience in similar companies. Accurate data on compensation are usually inaccessible other than through various research companies. In recent years, many databases have begun supplying free information via the Internet as a means of promoting the sale of their services. Both the employee and the company can obtain vast information about the customary pay in the market at any given time. However, the data often do not include details of the value of the option packages awarded to employees, since such details involve a valuation of the companies.