Paying market-rate salaries is a good investment for startups
It’s a seductive notion to a startup: pay your employees below-market salaries to save your precious cash. But scrimping on salaries is a penny-wise, pound-foolish practice that will end up costing you more money in the long run.
I’m not talking about early-stage founders with their first few employees here. Rather, once your company has significant traction and series A funding, and is on track to grow 20% or more, there are three main reasons why persisting with below-market compensation will impede your company’s progress.
1. You won’t attract top-tier talent
If you don’t pay market rates, you hurt your ability to attract top-quality candidates at a time when your company critically needs them. Low salaries may suggest to candidates that your company’s growth trajectory is uncertain and that you’re worried about future revenue or investment sources. They could also damage your brand, something that takes a long time for a startup to build.
When you’re hiring for a role, think about how much potential revenue the right candidate will drive for your investment rather than focusing on the amount you’ll be paying them.
It’s also best to be upfront about salaries. If you keep your salary intentions undisclosed until the end of the recruitment cycle, you could lose a great candidate after spending six to eight weeks wooing them (or even more time for a senior or specialized role).
2. You’ll spend more on hidden costs
Finding and training a new hire costs much more than simply paying a salary. In fact, it’s one of the most expensive investments a company can make because the process has so many hidden costs. These costs include the stress on your team when there is a job vacancy and the cost of diverting labour away from developing new product features, servicing clients or any other revenue-generating activities as a result of a drawn-out recruitment process.
I’ve been in situations where company executives refuse to pay the market rate for product managers, which results in the hiring process taking three to six months longer than necessary. After factoring in the total labour costs of holding multiple rounds of interviews with several candidates, the cost of acquiring a suitable employee can reach $30,000.
3. You’ll spend less time on business development
The more time that you spend searching for that perfect needle-in-a-haystack candidate who is both highly skilled and willing to work for a low salary, the less time you’re spending on your most important task: business development. Founders often tell me they spend up to half their time in recruitment mode. While some of this time is certainly well spent—especially if you’re being a brand ambassador for your company and building a pipeline of candidates—it can be time wasted if you’re micro-managing the hiring process and making snap decisions to gain short-term savings of a few thousand dollars in annual salaries.
All of this is to say that startups should aim to pay their employees competitive market salaries as soon as they can, which is often a lot sooner than many entrepreneurs think. How do you determine the optimum salary to pay your staff? Here are a few tips for compensating both new and existing employees.
Strategies for setting employee salaries
Startups should develop a comprehensive framework for hiring new employees based on factors such as market-rate salaries, the benefits that are most in demand, and the reasons why your company is attractive to potential recruits from a career-building perspective.
Commit to a consistent compensation approach instead of making one-off discretionary decisions. Also consider your overall package—that is, the total rewards, including benefits, perks and equity, when compared to your competitors.
Understand the salary you should pay for each role within your company and whether you lead, match or lag behind the marketplace. This means collecting fresh data annually, as well as whenever you are hiring for a new role. Keep in mind that the compensation levels for roles such as data scientists and product managers change frequently, so you will need to do your research to stay current. LinkedIn, Stack Overflow and Hired offer publicly available data, while Brightlights and Advanced-HR Inc. conduct their own compensation surveys that are relevant to high-growth tech companies.
It’s also important that you offer competitive benefits that appeal to today’s generation of talent. For example, League offers its employees flexibility in where and how they get their work done as long as objectives are met. Borrowell offers family-friendly options, including topping up of parental leave, while Opus One Solutions lets its employees work on personal projects as part of their day jobs.
Invest time to fully articulate why a candidate should work for your company. Your pitch should lead with examples and stories about your company, with data to back them up. Here is an example from Ecobee, a company that leads with a purpose in cleantech.
Don’t forget your existing employees
You should give both current employees and potential hires an itemized list of the full compensation package you offer, including cash and non-cash compensation, additional perks, equity and so on. Include stats on hidden benefits that compare what you offer to industry average—for example, flex time, vacation, leave time and career mobility.
Scrimping on salaries to make the best use of limited cash may initially seem wise, but recognizing salaries for what they truly are—an essential investment rather than a cost—is the smarter move in the long run.