This article is part of the newsletter OpenBooks crafted by LiquidCFO and was originally posted in Substack. You can access the original content here.
Let’s talk about the largest expense of (almost) every business: salaries.
Compensation strategy is one of the things you need to think about early on – since getting this one wrong can create a catastrophe in your business.
Let me start by asking you a question: what was the framework you used to determine the salary of your most recent hire? High odds that it was based on one of the two options: 1) salary for the previous employee in that position (in case of a replacement); 2) based on what the candidate was getting paid in his previous job. Both solutions leave room for an arbitrary pay policy in your company, as you will always be subject to randomness of the candidate’s last pay.
The framework I suggest startups CEOs and entrepreneurs follow is not too far away from this informal ‘benchmark’ – but it creates a better system to determine the pay. And when it comes to compensation and people management, it is always better to have a system to minimize the complexity that comes along with it, making discussions less emotional and personal and giving you the room to distance yourself from the decision being made – as it relies on data (it’s not about you, it’s about the data 😏 ).
Start by doing proper research and establish a range of salaries for your company (for the current functions and the ones that you believe are going to be needed as the business grows) based on seniority, role, location, and benchmark for your industry. You can find good resources for benchmark salaries here, here and here. According to the level of transparency you want to bring to your company culture, I would even suggest making public not only the compensation policy, but also the actual pay levels for each position. This would mitigate questioning of how much someone joining your company will be able to make and would set a clear framework of how to achieve that.
Now, a performance review is another aspect that goes hand in hand with a compensation strategy. It’s as critical to have a performance review in place that is also clear and stable, to avoid double standards in promotions and once again – demotivate your employees.
As you all know by now, I’m a finance-control-freak turned into a startup operator, which means that I had to adjust my ‘corporate’ frameworks to the reality of startups and small businesses so I always suggest a simple and actionable policy. For the performance review it wouldn’t be different then. I would suggest applying the ‘consultancy framework’, which is used by consultancy firms (very creative name, Leticia 👍🏼 ) at the end of each project delivered, and it is composed of 3 simple questions that are made by and to all team members in the project:
- What does this person should keep doing?
- What should this person stop doing?
- Would you recommend others to work with this person?
Use scores from 0-10 for question #3 so you can have both quantitative and qualitative data.
Having data points will assist you not only with a discussion in the future about the performance of the employee whenever it comes to place, but also to make the decision about pay rises much more straightforward, as you can compare to peers results, for example. I’m no HR expert but I’m data-driven and focused on small wins, so having a simple framework is better than none.
To establish how much to increase the salary, I suggest using inflation or a similar benchmark for the location you are based in, or for your industry. You can also use the same tools that you used for your research on basic pay compensation strategy (here again we see the importance of doing some upfront research and having a compensation policy).
People are the foundation of any business. If you take the time to establish a proper compensation and performance review that is simple, fair, and honest, you will save long and endless conversations in the future that could cost the livelihood of your company.
And always be mindful that individuals that decide to take on jobs instead of being entrepreneurs quite often do so because of the safety related to their salary income, so having a clear understanding and agreement of their compensation is a great way to align expectations and get better results on everyone’s work.
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