How To Pay Startup Employees Fairly

Are you being paid fairly? I need an honest answer.

I’ll go first, and if I’m being totally honest: In 20+ years doing startup, I’ve been underpaid way more often than overpaid. I’m willing to bet your answer is similar. I used to think salary didn’t matter, because I love what I do. But along the way I’ve learned that it’s critical to get employee pay right from the beginning.

So how do we do that? Simple. We pay our startup employees what they’re worth, by assessing their motivation, getting to value, and avoiding some basic mistakes. But don’t misunderstand me. That may not always equate to what our startup employees actually want. So we’ll need to lay some groundwork first.

Small Outliers Add Up Quickly

As leaders, we need to value our employees properly, and as employees, we need to value our jobs properly. That requires a balancing act as we bring new people on, and a few outliers here and there can eventually throw everything out of whack.

Yeah, sure, maybe we give that rock star employee a little more than the going rate to keep her away from a competitor, or maybe we get a great deal on a developer who doesn’t realize the magnitude of her talent. We can do that once, maybe twice, but it’s going to quickly spiral into a major crisis as we grow. Every successful startup eventually comes to a crossroads, at which point we’re faced with leveling employee pay up or down to meet the current market.

The Old Solution: Salary Ranges

About 10 years ago, I stopped putting salary ranges on job postings, because it sets a false expectation.

I’ll be the first to tell you there are some ugly discrepancies in employee salary for the wrong reasons, everything from gender bias to the Ivy League-ness of the school the candidate graduated from. But salary ranges and pay grades are a bad solution to a bad problem.

What happens is we end up paying every employee based on experience — which usually just equates to time served — and education level — which is often enhanced by mostly bull**** certifications.

It’s really, really hard to scale this fairly, so we toss our hands up and pay everyone with three to five years experience and a four-year degree between, oh, $60K and $75K. There. We reduced our liability down to a $15K range.

Still stupid. Just less stupid.

The real answer is we should be paying our employees based on individual value — what they bring to the bottom line — and individual motivation— what they need, to a certain extent.

Getting To Value and Motivation

We’ll need to get motivation data from prospective hires quickly, ideally during the introductory call before the first interview. I like to use these two questions in this order:

  1. What do you want to be making at your next job?
  2. What is the minimum you’d take and still come to work happy every day?

The first question always gets a long, drawn-out explanation with maybe a number or a range. The second question is sneaky because once they answer the first question, the second answer becomes a tell for what the candidate really wants. They know if they go too low, they’re telegraphing their excitement about the position and the company. If they go too high, they look like a mercenary. So most of the time, they wind up just answering the second question honestly.

If their motivation number is in our ballpark, we’ll just need to rule out the value exceptions.

Exception 1: Pay for Experience, Not Seniority

Here’s why experience matters: We’re going to want people around us who are familiar with getting from point A to point B regardless of what tools we’re using to get there. I’ve done startup with all 20-somethings and I’ve done startup with what I’m now calling “proper old folks.” The latter is much easier, both in getting things done and in the timbre of the room when things go wrong.

“Yeah, we just lost our biggest customer. Here’s what we do.”

Experienced people are our anchors, and every startup needs at least one, if not many. They’re expensive because their needs and motivation are different. They have mortgages, kids, retirement breathing down their neck, and they’ve probably learned some costly life lessons along the way.

Hire experienced people, preferably the ones with scars and failures.

But do not — do not — overpay for the senior person coming from 20 years doing the same thing at a single company without so much as a blemish on their resume. If they’ve been doing the same thing the same way forever, they’re never going to understand why we’re doing what we’re doing.

Exception 2: Don’t Overpay for Intelligence

Don’t mistake intelligence for vision.

Years ago, we hired this super-smart developer when we were in desperate need to move the machinery more quickly with less mistakes. I didn’t like this guy from the get-go and I was against his hiring. I’d seen this guy before, dozens of him. He talked a great game but when it came time to do new things that worked properly and under deadline, he crashed and burned. It was a disaster. An expensive one too.

Lesson learned: Intelligence is not a predictor of the ability to execute.

We also shouldn’t fall prey to the salary creep coming out of both Universities and code schools. We’ll wind up with someone who has a solid education, top grades, is smart as hell, but has never sent anything to customer production. They’ll come in demanding six figures. They’ll probably get it somewhere.

Let someone else make that mistake.

Exception 3: Don’t Underpay for Quiet Talent

As we get better at bringing in value, we need to make it a point to never underpay for the talent who isn’t demanding what they’re worth.

The candidate who is worth $75K and wants $100K is going to want $125K next year. The candidate who is worth $75K and will accept $50K is probably going to be OK with $50K next year. But if we give them $75K out of the gate, then they’re never going elsewhere because we saw their value when no one else did.

This is what’s important to them, not money. So we need to step up, even when it’s painful to overspend in the short term.

A Possible Answer: Contracts, Incentives, and Schedules

One of my fellow founders has always wanted to hire employees like you hire athletes. Contracts and contract extensions, guaranteed money, incentive clauses, extensions, the whole thing. Now, I always throw barbs at this theory, bringing up things like unions, arbitration, and holdouts, but she’s got a point.

It has always bugged me that we’ll send a prospective hire a 10-page employment agreement that looks like every other 10-page employment agreement but doesn’t address either their value or their motivation.

So that’s where we start.

When an executive negotiates a contract, that contract includes the salary and equity and all the normal stuff, but it also addresses incentives, bonuses, even milestones. In other words, it specifies paying the executive what they’re worth with the money that executive is going to generate for the startup: How, when, and how much.

This way, experienced and talented executives can work for the minimum that’s going to make them happy every day (my second salary question) and still be able to get what they want to make at their next job (my first salary question). Everyone wins. The executive gets what they need and the startup gets talent they might not yet be able to afford.

However, that kind of contract reaches a ridiculous peak when a CEO like Bob Iger gets $63 million for making billions for Disney while the average Disney employee might scrape by, even though those billions couldn’t be made without them.

I’m not political, I just don’t like bad math. So I ask you: Why isn’t an executive contract practice standard for every employee?

One pushback is that once we start paying based on motivation we wind up incentivizing a whole bunch of different goals.

But isn’t that what we’re already doing?

When we pay based on ranges and grades using time served and education, we’re just assuming everyone’s motivation is cash and that there’s one true path to success. Once we replace time served and education with value, we have the flexibility to replace ranges and grades with motivation.

A second pushback is that a massive and long-established company like Disney can’t do this without a huge expense and a major disruption. Yeah, they can suck it up, but customers will get screwed, jobs will get lost, investors (including you and me in the public markets) will get saddled with the bill. That’s the reality.

But startup is about creating a new normal, especially when we start doing things differently from the beginning. Value and motivation, milestones and incentives. When we do it this way, we get what we need from every employee and every employee gets what they need from us.

It’s also another great way to take on the incumbents. We get talent at value because they can’t move fast enough to adapt.