Why Is a Strategic Compensation Plan Vital to Startup Success?

As a key decision maker in the growth of your startup, you know that every decision counts. Your mission to build a thriving business from the ground up all starts on day one. But many founders, CEOs, and CFOs overlook one of the most crucial factors in ensuring their startup’s success—developing a strategic compensation plan.

When your startup has secured funding and your groundbreaking business idea is taking shape, the majority of your spend will be on your people, and your company is at a critical juncture where the right compensation plan can make all the difference.

We’ll review how you can unlock the power of a strategic compensation philosophy to attract the right talent, create a sustainable employee compensation package at any stage, and scale smartly.

Considerations of a Compensation Plan

The number one goal of a compensation plan is to attract and retain top talent. To do this in a strategic way, your compensation plan should consider more than just salary or wages. Your comprehensive plan should include total cash (salary or wages and bonuses or commissions), equity, and health, wellbeing, retirement, and global benefits.

A Quality Compensation Plan Attracts & Retains Quality Employees

Building a team of exceptional individuals who share your passion and commitment is key to startup success. But attracting top talent requires more than just an exciting vision. A well-designed compensation plan acts as a magnet, drawing in high-caliber team members who will be instrumental in driving your business forward.

With 49% of candidates accepting a position because of compensation, and with pay transparency legislation becoming more prevalent across the US, it’s vital your employee compensation plan be competitive.

When your compensation plan aligns with industry standards, it demonstrates your dedication to valuing your employees. This sends a powerful message to potential hires that you are invested in their success and will reward them accordingly. The result? A team that is motivated, engaged, and ready to push boundaries to help you hit your next round of funding.

How do you ensure your compensation plan is equitable and competitive in your market? When you have direct access to a compensation benchmarking tool, you not only can perform a full annual or semiannual salary benchmarking review, but you can see compensation trends in real time and proactively adjust your cash, equity, and benefits. For example, you can see that Gen Z (who will make up 30% of the US workforce by 2030) has some of the highest compensation expectations of any generation, even when considering inflation.

However, many startups must walk a fine line when creating compensation packages. Low levels of cash compensation eliminate high-caliber employees from the candidate pool, but unrealistically high levels can raise red flags for potential investors and threaten the solvency of your startup. And with 2023’s economic climate, startup layoffs and hiring reductions increased while salary benchmarks fell across all seniority levels. Given these factors, having the right tools in place to help you quickly model scenarios and adapt your compensation plan can be hugely beneficial to boardroom-level discussions.

Creating a Sustainable Employee Compensation Package at Any Stage

As stated before, a comprehensive compensation plan goes beyond a simple paycheck. It includes a mix of cash, equity, and benefits that cater to the needs and aspirations of your employees. This holistic approach not only enhances your ability to attract the best talent and keeps them motivated and loyal, but it also allows startups to compete with mid- and enterprise-size companies for the existing talent pool.

When startups’ spending capacity declines, equity ownership can be a game changer. It provides an opportunity for employees to become true stakeholders in the company’s success. This sense of ownership fuels dedication and drive, as every individual understands the impact they have on the overall outcome. It also places less of a burden on the overall company cash flow and allows for more flexible salary negotiations. However, if funding rounds grow scarcer, startups should be more conservative with the remaining available option pool and competitive salaries may take more of the driver’s seat.

In addition to equity, offering competitive benefits packages highlights your commitment to the wellbeing of your employees. Healthcare plans, retirement savings, and flexible work arrangements are just a few of the rewards that can set your startup apart from the competition. Use your startup status to your advantage. Unlike large enterprises, startups typically don’t have set and strict employee policies. This allows for a more flexible workplace and schedule. And when 93% of workers want a say in when they work and 81% want control of where they work, this can be a huge employee compensation package advantage.

Building a Compensation Plan That Scales with Company Growth

Startups are known for their rapid growth and potential for exponential success. A strategic compensation plan sets the foundation for this growth by ensuring that your employee compensation package scales with your business.

As your startup evolves, so will the demands on your team. Consider incentivizing performance and milestones to motivate your team to go above and beyond. This forward-thinking approach not only drives growth but also cultivates a culture of achievement within your startup. A flexible compensation plan allows you to adjust salaries, bonuses, and incentives as needed to attract and retain top talent. It also provides a safety net, ensuring that, as your startup expands, the solvency of your business remains secure.

When companies create compensation plans that outpace company growth, your overall people spend increases burn rates and becomes an unsustainable burden on your cash flow. Offering employee compensation packages without a proper compensation plan can be a catalyst for layoffs and salary reductions.

Get Your Compensation Philosophy Right from Day One

To ensure you’re evaluating your overall cash, equity, and benefits offerings, you need the proper tool that helps you get your strategic compensation philosophy right. In the fast-paced world of startups, embracing the power of a strategic compensation plan is not a luxury—it’s a necessity.

However, some founders, CEOs, and CFOs may not know where to start when it comes to creating their compensation philosophy. That’s when guidance from a compensation advisory that specializes in helping VC-backed startups reach their goals becomes invaluable.

See how you can build a compensation plan with Sequoia One that attracts quality employees, is sustainable at any stage, and scales smartly. Experience our holistic approach to total comp and benefits, including our comp advisory and end-to-end compensation management solution. Get ready to build an employee compensation package that aligns with your long-term business goals.

Scot has spent the last 20+ years of his career serving as a trusted adviser for his clients, partners, and internal associates. In his current role, he is helping tech startups realize the right balance between quality and cost in their total people investment strategies. Scot has held multiple leadership positions in sales, operations, and customer service and understands the pioneering spirit required for startup success.

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