Five ways to avoid paying A-Rod money for talent
Originally published by Robert Hatta on April 24, 2017
I help startup founders hire amazing people into their companies — the kind of people that shift the trajectory of a business, add to its culture and raise expectations across the entire team. As hard as it is to find people like this, I’ve learned that many founders (and their boards) spend too much time worrying about overpaying for talent.
They will spend hours wringing their hands over the same basic question: what if we pay all this money and the person doesn’t work out? I call this the A-Rod effect after the baseball player who earned $480 million across a career marred by controversy and declining performance. Nobody wants to get stuck paying “A-Rod money.”
I understand their fears. Money is tight and equity is precious, especially at an early stage startup. It might be the first time a founder has ever hired someone really senior. The more senior the role, the higher the stakes for getting it right. No one wants to make a hiring mistake and overpay a person in the process. Over the years of helping dozens of startup CEOs hire hundreds of executives, I’ve observed that there are five simple guidelines to ensure you never overpay for talent.
1. Run a good process and reduce the chance of a bad hire
The first thing that CEOs must do is decouple the fear of making hiring mistakes from the topic of compensation. Hiring mistakes suck. They are expensive, can stall momentum and damage morale. But the size of the comp package has little impact on any of this. Build an engaging, accurate and consistent recruiting process. Worry about compensation later.
2. If salary is the most important thing for a candidate, you’re talking to the wrong candidate
As I noted in a previous post, supremely talented people value the quality of their colleagues, the mission of the company and the impact of their work far more than compensation. That’s not to say getting paid (in some cases, very well) isn’t important. But if that’s a major part of the conversation throughout the process, it’s time to move on. At best, the candidate is clueless about startups. At worst, they are motivated by the wrong things. Even professional athletes will (sometimes) take a pay cut to win a championship.
3. Know what market compensation looks like
Comp data is not an exact science. Every situation is different because every individual person, their needs, and what they value are different. This is especially true when talking about startups. That said, you should still know what the market pays and what your candidate currently makes as a basis for benchmarking your offer.
There are several ways to gather data on salaries for your region, stage of company or industry. I recommend you try to pull in at least two to three separate data sources from which to derive a range. For private, VC-backed startups, Advanced-HR and Compstudy.com provide salary and equity data for senior executives. Angel.co provides free data on individual contributor roles at startups.
4. Equity is your friend
Budgets and balance sheets are real. And cranking up your burn can put your company at risk, even if you’re hiring someone that is truly special. Know the difference between what you can pay now versus fair market, and then close the gap with equity. Equity is precious, but is often more flexible than cash budget constraints. And vesting schedules protect the company from shelling out options to folks who no longer work there, which brings me to my final point.
5. Set expectations, track performance and fire quickly
The real mistake occurs when a CEO continues paying a bad hire or mediocre performer. This is the hardest thing for CEOs to grock. The New York Yankees weren’t complaining about Alex Rodriguez’s contract when he was batting .302 and averaging 41 home runs over the first five seasons, earning nearly $27 million per year. But things changed over his last five seasons, when his averages dropped to .270 and 20 home runs while he earned more than $31 million per year. A-Rod money is only A-Rod money when you don’t (or in the case of the Yankees, you can’t) fire someone for underperforming against expectations. Startup CEOs don’t have this problem.
I’ve never, not once, heard a CEO complain that they overpaid for rock star talent. If you are making a lot of hiring mistakes, overpaying for talent isn’t your problem. Your process is your problem. If you’re holding on to bad hires or mediocre performers, you are definitely overpaying. In these situations, the solution is simple: stop.
