As businesses continue to integrate artificial intelligence (AI) into their operations, AI startups and their investors are taking full advantage of the growing market. Early-stage investing in the tech industry, especially in AI, is seeing more cash flow than other industries.
On the other side of the coin, however, these companies are hitting a new bump in the road on their way to exit. Despite their high potential for growth, AI startups face the daunting challenge of attracting and retaining qualified talent. The talent shortage of skilled engineers and developers needed to help these startups scale is coming at a high cost—and we’re not just talking about delayed productivity and releasees.
While the AI talent pool has always warranted light poaching, the talent hunt has recently reached the next level of expense. The Wall Street Journal reported that some candidates are seeing compensation packages of more than $1 million, and poaching has gone from light to flat out aggressive. CEOs of big tech companies like Meta, Microsoft, and Google have even started to personally court experienced AI candidates with eyebrow-raising job offers. In addition, some companies are switching tactics and recruiting full departments at once, hoping to cut down the time and cost associated with getting new teams up and running.
With all these arguably astronomical compensation packages flying left and right throughout the small AI talent pool, startups are asking themselves how they can grab a seat at the poaching table among tech giants without completely decimating their runway and equity.
We’ll explore how AI startups can combat the talent shortage with a strategic compensation and benefits offering that secures top talent while helping the company scale smartly.
Foundational Benchmarking: Understand the Comp and Benefits AI Talent Wants
Fighting for AI talent can feel like an insurmountable task for startups, but offering compensation and benefits packages with a shotgun approach is a recipe for disaster when it comes to the company’s long-term business plan. Some companies may find themselves with second-tier talent due to compensation and benefits offerings that underwhelm qualified talent. This could impact the quality of the company’s innovations and the time it takes to reach IPO or exit.
The first strategic step in securing and retaining AI talent is benchmarking compensation and benefits offerings. Understanding the trends in compensating AI professionals helps startups create attractive and competitive packages for potential employees.
Thorough benchmarking gives a clear picture of what competitors are offering, including salary, health benefits, flexible work arrangements, professional growth opportunities, and a rewarding work culture. This understanding helps AI startups position themselves competitively in the market. Having a compensation and benefits structure that’s well-aligned with industry standards plays a significant role in enticing top AI talent to join and remain at a company.
How Compensation Benchmarking Helps Navigate the Talent Shortage
When benchmarking a compensation package, look at data on salary, wages, bonuses, commission, and equity. This will show if you’re overpaying or underpaying for AI talent. When compensation is the largest spend for AI startups, overpaying or underpaying employees can be detrimental to long-term startup success.
Zuhayeer Musa, cofounder of tech recruiting company Levels.fyi, told The Wall Street Journal that the median salary across 344 machine learning and AI engineers with jobs at Meta was $400,000. For AI startups who find competing with tech giant salary offerings daunting, benchmarking shows that companies leverage equity to recruit and retain top talent when cash is particularly tight. Many candidates are attracted to future possibilities of returns and may forfeit larger initial salaries with expectations that stock will reward them more at IPO or exit. Benchmarking will help determine what balance between cash and equity a company should adopt when creating their compensation packages.
How Benefits Benchmarking Impacts AI Startups
When benchmarking benefits, look at insights covering healthcare, wellbeing, people policies, and retirement programs, as these are the core categories employees consider when evaluating the value of a benefits package. Consider which benefits other employees in the AI industry utilize and which benefits AI companies exclude. Ninety percent of employees said healthcare is an extremely important benefit they consider when choosing a job. Eighty-three percent of employees said flexible work and leave time are also important considerations. And sixty percent of employees said their overall employee benefits were a main factor when they chose to stay with their current employer. When benefits are the second largest spend after wages for AI startups, providing the right mix of benefits helps candidates determine who they’d like to work for.
The North Star: Following Your Compensation Philosophy During a Talent Shortage
An AI startup’s compensation philosophy is a statement that formalizes the company’s position about their employees’ total compensation, including total cash (salary or wages and bonuses or commissions), equity, and health, wellbeing, retirement, global benefits, and perks. A strategic compensation philosophy sets the tone for how a company values and rewards its employees and focuses on the company’s long-term success instead of short-term goals. A compensation philosophy aligns employees’ compensation packages with business goals and the returns AI startups deliver to their shareholders.
For example, if an AI company’s strategic goal is to reduce risk in business operations, their compensation philosophy could include annual incentive awards, performance awards, and clawbacks, depending on employee performance in business areas that lead to risk reduction, such a passing phishing email tests and cybersecurity checks. Setting performance-based compensation expectations also allows companies to get back on track when compensation philosophy drift occurs.
This drift happens when AI startups pay higher than expected salaries to secure the initial key talent needed to help their company scale. To ensure a compensation philosophy attracts, recruits, retains, and engages current and future employees, it needs to be continuously evaluated and evolved. With the AI talent shortage, many startups find it unavoidable to drift from their compensation philosophy. Because of this, it’s not uncommon for these companies to quickly burn through capital, especially in their early stages.
However, as they become more mature and their workforce staffing becomes less volatile, AI startups should prioritize structured pay ranges and headcount plans that align with their established compensation philosophy to get them back on track.
Extending Runway: Setting Sustainable Headcount Plans and Pay Ranges
Understanding the capital requirements of hiring and maintaining a well-rounded team leads to achieving business goals while ensuring financial stability. It’s also a key indicator to investors that leadership has a strategic, long-term vision on how to reach IPO or exit. Strictly dictating the number of active employees isn’t effective to controlling people spend. Instead, pay ranges and a headcount plan should be created to sustainably scale and avoid shutdown due to exhausted runway from overpaid and overhired teams.
How To Implement Appropriate Pay Ranges for AI Talent
Pay transparency and other pay equity regulations make setting and communicating pay ranges for open and existing roles nonnegotiable. Displaying competitive pay ranges is particularly important with the AI talent shortage and can help attract quality, skilled workers.
Depending on the skill level, years of experience, and education level required to be successful in each position and location of residence, each pay range will have a minimum and maximum salary listing—especially in a remote and distributed workforce. An engineer living in San Francisco, CA and another living in Richmond, VA do not have the same standard of living. Therefore, a blanket approach to pay elements wouldn’t be utilized when an AI startup is trying to stick to their compensation philosophy and pay ranges.
Most employees will be somewhere in the middle of the range, which allows room for pay increases without overextending cash flow. Pay ranges also guide promotional paths for AI talent. Once an employee sits at the higher end of a pay range, promotion should be considered to move them into a new pay range for their new position. This, in turn, also helps with retention. As other AI companies try to recruit existing employees, the current employer will already have a projected growth path that can compete with any new offer presented.
How AI Startups Establish a Realistic Headcount Plan
In addition to set pay ranges, a headcount plan is necessary for AI startups to stay on track with their compensation philosophy. As previously mentioned, AI companies often pay significantly more than their original compensation philosophy accounted for during hiring, merit, or promotion cycles to win and keep key talent that other companies attempt to recruit. Without an appropriately accounted for headcount plan, this excess in salary expenses can quickly become unsustainable and jeopardize runway founders and investors previously thought existed.
A headcount plan allows AI companies to financially prepare for the right number of people with the right skills to meet organizational needs in the short and long term. This plan also holds the AI startup accountable to previously communicated budgets — allowing for solid recruitment and retention plans.
To establish a headcount plan that considers the AI talent shortage, startups need to align it to business goals. Is the company expanding to new markets and needs employees with local language skills? Is the AI startup launching a new feature during product development and needs additional engineers to support it? The headcount plan will help guide the hiring budget based on forecasted business performance and changes in the market.
Third-Party Support: Partnering with a PEO That Helps Secure AI Talent
Many AI Startups don’t have in-house team members who are knowledgeable or have the bandwidth to benchmark compensation and benefits, develop a strategic compensation philosophy, set pay ranges, and establish a headcount plan. Finding a third-party partner that specializes in helping tech startups navigate the AI talent shortage can help companies attract, retain, and engage key talent.
Sequoia One is the only PEO specifically built for tech startups, with a proven history of helping companies develop their strategic compensation and benefits offerings to secure talent and extend runway. From compensation and benefits benchmarking to compensation drift solutions, our advisors, service team, and award-winning platform help turn AI startups into established AI enterprises. Explore Sequoia One today and see why we’re the most referred PEO in tech.
