How Much Over Market Should You Pay Employees?
The days of expecting employees to work only for equity are long, long gone.
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Early stage employees have a gotten a lot smarter and a lot savvier than twenty years ago. Your employees have options including working for large established companies.
That means your crappy offer to work for no salary will not cut it.
You want to hire great people then your offer has to be better, yes better, than the competition. Now this doesn’t mean you have to pay a higher salary than your established competition. It does mean your complete offer has to better than the competition.
What does a better offer from a startup mean?
Let me give you a way of thinking about it.
Here are the components of what you can offer an employee to join your startup:
Salary + Stock + Job Value
Here are the components of what your competitors can offer the same employee:
Salary + Stock + Job Value
It’s exactly the same. So it’s obvious what you need to do:
Your Salary + Your Stock + Your Value > Their Salary + Their Stock + Their Job Value
If you set your employees salary to zero, then the stock you offer employees better be through the roof. In other words, it’s pretty tough to be competitive, let alone better through a stock only offer.
It’s also pretty tough to be competitive with a ridiculously low salary offer.
The reality is your not going to pay more in salary than an established competitor.
But it does mean you have to pay something reasonable to your early stage employees. What’s reasonable? Well, that’s as close as you can get to market rate.
If you’re bootstrapping, you might be well off market rate. That’s okay. Then the value an employee gives to the stock, and the value an employee gives to the job have to be off the charts.
This is why early stage employees get significantly more stock than later stage employees. However…
Offering your prospective employees more stock will not solve all your problems.
Sadly, you’re going to come across the spreadsheet jockey’s. Let me introduce you to what a spreadsheet jockey is.
A spreadsheet jockey is the prospective employee that will build a spreadsheet and put a value on the equity you give and a probability of that equity being worth something. It sounds logical, but (and it’s a big, big but) the spreadsheet jockey will always value the equity lower than leaving your larger competitor.
It always works this way. So you need one more thing to snare top talent…
You need to give prospective employees work they will not get to do anywhere else.
Competitors can offer employees great compensation, but the one thing they can't offer them is the work they're going to do at your startup. For example, you can hire the Director of Sales at a competitor to be VP of Sales at your company.
Or, you can offer that great engineer you're recruiting the cool work they will be doing for you. This is something no other company can match. That's how you win. Finally....
You need to hire true believers and fanatics.
Here’s the thing. You can’t buy your way into hiring top talent because nonbelievers will put no value on your stock and no value on the job.
You’re not going to win over the great talent that doesn’t truly believe in your mission. However, you can win over the great talent that does believe in your mission.
Doing this is amazingly simple. Just give the great talent you find exciting work to do, pay them fairly, and give them a generous option package.
Again, I’m not saying you should overpay. I am saying be generous. Generosity, combined with a reputation for fairness along with exciting work is a winning formula to build a great team.
For more, read: Why You Need Fanatical Cofounders
Do You Want To Grow Your Business? Maybe I Can Help. Click Here.
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