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COMPENSATION

7 Compensation Strategies for


Cash-Strapped Startups
by Amelia Friedman
JULY 12, 2018

HBR STAFF/PHATHARAPOL NOPHARAT/EYEEM/GETTY IMAGES

As a startup founder, I’m constantly struggling to recruit top talent without breaking the bank.
We can’t always match market salaries, but we need exceptional (read: expensive) talent in order
to build from scratch. How do you recruit a developer making well into six figures, or an
experienced salesperson with four kids in private school? At our company, Hatch Apps, we’ve
learned to get creative.
Here are some of the strategies that we’ve used, which are hopefully helpful for your business
whether it’s an early-stage startup with limited funding or a more mature organization that has a
restricted budget. Many of the tips below aren’t free, but they’ll help you squeeze more value out
of each dollar you spend on compensation and minimize the cash at risk if your hires don’t quite
work out.

Pay for performance. When we’re hiring someone who has a hard-to-match base salary at their
current employer, we cushion our offer with a lucrative bonus structure, commission pay, or
other performance incentives. That way, they get paid for the value they add, up to or beyond
their current base salary. And it shrinks the gap between cash going out and coming in for the
company since you’re often not paying out the money until the additional revenue is banked.

Performance pay isn’t just for your sales team — you can bump your marketing person’s bonus if
he doubles his qualified leads, or an engineer’s salary if the product she builds goes live for
customers on time. When negotiating an offer, you can discuss what’s achievable and agree on
what the prospective hire should end up making if they’re as excellent as you think they are. A
caveat here: Make sure incentives align with metrics over which the employee has control.
Otherwise you’re setting them up for a disappointment that could lead to their resignation.

Exceptional hires are often energized by performance-based pay, especially if it means they could
end up making more over time. Another benefit? Performance-based pay often scares away less
competent employees who know they’re unable to deliver on what they’re promising. 

Cover expenses before taxes. Parking, metro passes, gym memberships, hardware, snacks, the
occasional lunch — over the course of a year, these costs add up for an employee. In our building,
for example, parking alone can easily exceed $300 per month. By paying these expenses out of
your corporate account (or even out of pre-tax earnings if you’re in the U.S.) you can stretch
limited dollars. At Hatch Apps, we’ve covered laptops, metro passes, parking spaces — even
grocery store gift cards.

In the U.S. you can often make this easy for yourself by going through your payroll provider or
professional employer organization, both of which are often plugged into local transit
administrations or other benefits providers. They can also help you avoid making costly mistakes
on taxation of fringe benefits; you don’t want your employees to be hit with unexpected phantom
income taxes for free perks.
Reduce risk in case of turnover. You can cushion or reduce your risk with a signing bonus or
quarterly retention bonuses, both of which are swiped if an employee leaves the company too
soon. A signing bonus can also be used to poach an executive from her current company prior to
an annual bonus or ahead of a stock vesting schedule — the cash up front is a form of
reimbursement for what she’ll be leaving behind. The initial outlay for you can be worth the cost
savings of retaining good talent.

Invest in training and professional development. Pitch a prospective hire on the opportunities
they’ll have to grow and advance in their career at your company. Successful professionals have
invested in their career and want to continue to do so. We encourage our team to take time during
work to develop new skills or to speak at conferences. And even though we’re a small company,
we ask employees to set goals and report on professional growth during our quarterly reviews. It
may cost us a few hours of productivity per month, but we’ll earn that time back as our
employees leverage new skills or networks to be more efficient at their jobs.

We’ve seen other startups create a formal mentorship program where they match junior
employees with senior ones, and pair senior executives with external advisers or investors. At our
company we’ve connected employees to experts in their field for one-on-one coffees and
instituted weekly lunch and learns where we bring in interesting people from our industry to
share their experiences with the full team or teach us something new. These programs don’t have
to be expensive, especially if you’re a small company, but showing that you’re invested in helping
people grow can be a big draw during the recruitment process.

Leverage equity compensation or profit sharing. At startups like ours, stock options are often a
major component of compensation packages. We give each incoming employee an equity
grant that vests over four years with a one-year cliff, so if a new hire leaves within the first year,
she’s also leaving behind her shares. When we grant these options, we explain what they might
translate to in cash as the company grows, and we discuss how that employee can contribute
toward increasing the stock price. Some companies instead leverage profit sharing, whereby all
eligible employees take home a set proportion of cash proceeds at the end of each quarter. In both
scenarios, your team does well when the company does well, thereby aligning incentives for
performance.
Promote balance and flexibility. You can adopt other noncash incentives such as generous
vacation and leave policies, flex time, remote days, half-day Fridays in the summer, or
sabbaticals for veteran employees. At Hatch Apps, we have an unlimited vacation policy with a
requirement that our team members take at least three weeks off over the course of the year. We
also allow folks to work from home, and we don’t mandate set work hours. Many of these perks
are especially attractive to those of us with family obligations — being able to work remotely
when your kid is sick at home can dramatically simplify your life.

Reward with a job title. Some hires can be compensated with a title that’s a step up from their last
gig (as long as you’re not messing with your organizational structure, or breeding jealousy among
other employees). A lofty title doesn’t dent your wallet, but it’ll make a big difference for that
employee when they think about next steps in their career. That said, it’s important that his job
description match the moniker, or he’ll likely start looking for a role at another company with
that same title and more responsibility.

Above all, what’s most important is giving your employees meaningful work and then providing
them with the resources they need to be successful. A thoughtful compensation plan makes your
team feel valued, and that can be done with pay, noncash incentives, and many other
contributors to workplace happiness. Just remember that good pay with a couple of perks won’t
stop folks from leaving an otherwise miserable job. Compensation goes hand-in-hand with
corporate culture. Build a great one, and employees will be eager to join your team — and stay.

Amelia Friedman is the COO at Hatch Apps, an automated platform that enables business leaders to build
apps without coding. Amelia has been recognized as a Y Combinator Fellow, a Halcyon Fellow, and a Washingtonian
Tech Titan.

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