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Compensation describes the cash rewards paid to employees in exchange for the services they provide. It may include base salary, wages, incentives and/or commission. Total compensation includes cash rewards as well as any other company benefits.

Compensation strategy

Defining a compensation strategy is an important activity for all companies, including startups. The compensation strategy must be affordable, structured and reasonably competitive.


Your compensation strategy must be structured to best meet your unique business circumstances. As a startup, you may not be able to compete with large companies on salary. Therefore, you should consider a combination of options to attract and retain key employees.

Do not underestimate the value of the advantages or perquisites that your company has to offer that may not be readily available in larger companies—opportunities for interesting work, lack of hierarchy, flexible environment, and so on.

Some people are motivated by the desire to be on the leading edge of scientific or technological advances. They may take less pay to work for a startup if they believe in its future and the work it has to offer.

Salary and wages

A salary (or wage) is a fixed amount paid in exchange for an employee’s services. Ontario Employment Standards legislation entitles most employees to receive a “minimum wage” in exchange for the work they complete for a company.

For full-time employees, salary is generally described in annual, monthly, bi-weekly or weekly amounts. For part-time employees, it is generally described as an hourly amount.

To determine an appropriate salary and/or salary range that your company is willing to pay for a position, you must:

  • Establish the value of the position based on your organizational requirements
  • Understand what the market is paying for a similar position

Incentives: Drivers in attracting the best employees

Compensation can be divided into salary, benefits and incentives. While salary and benefits must be competitive, incentives are the most likely drivers of attracting and retaining the best employees in startups. There are three key types of incentives: bonuses, profit sharing and stock options.

  1. Bonuses
    • Individuals are rewarded based on attainment of performance-based goals (individual, team and/or company).
    • Goals must be realistic and closely matched to the business and people involved.
    • Payout potential should be large enough to be significant to the individual.
    • Bonuses can be set up to directly drive and support the company’s needs (for example, profitability, annual results, successful completion of projects and/or significant project milestones).
  2. Profit sharing
    • Payment is tied to company profits.
    • A pre-determined percentage of profit is shared among all employees.
    • Profit-sharing bonuses are generally paid out once a year in the form of cash or on a deferred basis.
  3. Stock options
    • An individual receives the option to buy company shares for a set price during a specified time frame.
    • Option can be exercised by the individual at any time during the agreed-upon term and subject to any vesting schedule.
    • Stock options are often part of management’s executive compensation but may be offered to key employees in lieu of a higher salary—especially where the business is not yet profitable and/or cash flow is constrained.
    • If the business does well and the company’s stock rises, the holders of the options share in the financial benefits.
    • In general, if the company permits a long period from the date of issue to the last date for exercising the option, it will encourage the employee to stay with the company and be fully committed to its success.

Commissions

Commissions are a common way to remunerate employees (salespeople) for securing the sale of a product or service. The intent is to create a strong incentive for the individual to invest the maximum effort into their work. Commissions are usually calculated as a percentage of the sale of the product or service (for example, 5% of a computer component’s retail selling price).

Payment may be either straight commission (no base salary) or a combination of base salary and commission. In general, the commission structure is based on reaching specific targets or quotas that have been previously agreed upon by management and the employee. These targets or quotas are typically tied to sales revenue, unit sales or some other volume-based metric.


Read next: Talent management: Defining your compensation strategy and plan


Summary: A compensation strategy (salary, benefits and incentives) must be affordable and competitive-—in startups, incentives are the strongest drivers to attract/retain top employees.


References

Butteriss, M. (1999). Help Wanted: The Complete Guide to Human Resources for Canadian Entrepreneurs. Toronto: John Wiley & Sons. pp. 99-120.