How To Remunerate Early Startup Employees?

A big issue in recruiting a good candidate in an early-stage startup is employee remuneration. Most early-stage startups cannot offer the same monthly salary to A-level candidates which good corporates or big startups can give. An early-stage startup founder may feel that the competition for talent is not fair. Bigger organizations have an unfair advantage in recruiting talent. This is not the case. There are some sweeteners that only an early stage startup can give.

I have researched this topic a lot since as an early-stage startup founder I also had a hard time recruiting good talent. I have created a visual tool called ‘Remuneration Canvas’ to communicate the options available to startups to remunerate high-quality talent.

I see the employee compensation from 3 lenses :

Head
Hand
Heart

In the lens of ‘Head’, I have put Employee Stock Options (ESOPs), since they motivate a potential employee to work in a startup logically. Any employee even if he or she works on a great salary will not become a multimillionaire if he or she does not get ESOPs. Also, the first few employees can get a bigger share of ESOPs than people following them. So let’s say if someone gets 0.5% equity as an employee then if the startup becomes a USD 1 billion dollar valued the startup at some stage then this employee’s equity will be worth USD 5 million. This person would never be able to get so much money in a regular corporate job.

I will take ‘Hand’ second since it concerns the in-hand salary. The in-hand salary will obviously be difficult to match for a startup when compared to established players in the industry. Here you can try to help the employee by customizing the package from a tax efficiency point of view. Most big corporates do not structure the salary package for each and every employee. They have general salary structures which cannot be customized for every employee. The startup can take its small size as an advantage and offer each employee a tailor-made package that is more tax efficient.

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Finally, I come to the lens of ‘Heart’. This is the biggest weapon in the arsenal of a startup when compared to a faceless big corporate. People work in big corporates for money. Corporates are heartless creatures who just become a machine to maximize shareholder wealth. The small early-stage startup is generally not funded and thus only shareholders are founders and other employees. A few family members of the founders may also be investors at this stage. Thus the employee can be given psychological motivators by the founders. I personally feel that psychological motivators have more power than any amount of salary or ESOPs. Why do people leave Google or other big corporations for small startups? The reasons are:

Flow: Need for the right amount of challenge in work
Self Determination Theory: Need for autonomy in the job, need for getting feeling of competence and a feeling of relatedness

Why do billionaires keep on working even though they can retire anytime? The reason is that humans crave for challenges. People want just the right amount of challenge to stretch them at work. I read about the concept of ‘Flow’ while designing and developing mobile games. The game designers know this psychological phenomenon and hook players by using this in game design.

Most corporate jobs are boring. Sometimes corporate and big startup jobs can get you into anxiety as they may challenge you more than you want. Startups due to their smaller size and better communication between the founders and employees can offer more fulfilling job roles. An early-stage startup should try to design job roles to be having just the right amount of challenge for employees. If the challenge and skill set are just right the employee will be going into the Flow state often, where the employee will feel highly motivated and happy to work.

Another interesting and famous psychological theory I found while researching human motivation was self-determination theory. It talks about providing autonomy, competence and relatedness to a person to motivate him or her. Interestingly video games provide these also. Smaller startups can provide more autonomy to their employees. Also, every human feels good when it is communicated that they are competent. An early-stage startup founder can give direct feedback. Direct feedback is way more powerful than any corporate feedback process. Many corporates do not have a proper feedback system also.

A smaller startup, being small, encourages relatedness. In a 5,000 people company, you cannot get proper relatedness feeling in most positions. A smaller startup can feel like a family.

Thus an early-stage startup should use psychological motivators to recruit and retain employees. These coupled with generous stock options and a decent salary allowing for day to day expenses will motivate employees who think long term and crave challenges.

Yes, there will be people who would not join startups for perks like free club memberships, gyms, food courts, the ability to buy flashy cars, etc but those who will join will join for growing the startup and having fun in that journey. They will be better employees in the long run for an early-stage startup.

Author: Saurabh Jain (Follow him on Twitter : @skjsaurabh)

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