Which Works Best? Raises vs. Bonuses vs. Options vs. Profit-Sharing

Q: When should you raise the salary of your employees as a startup?

A few thoughts to at least think about:

• Try to pay “market” to all your employees as soon as you can. Some folks that join a start-up will be OK taking a salary cut when you have almost no revenue or money in the bank. But you do have to go to market rates once you can afford to. You are asking too much, otherwise. Most things are fine “for a while” in a start-up. But only for a while. And in the end, employees that are under-market for an extended period of time have a lot of expectations back. You may have trouble making them all millionaires.

• Raises are valued much more than bonuses (logical or not) in the end. Many founders like to tie compensation to results and like bonuses for overachievers. Bonuses are great, but in my experience, they are quickly forgotten. It’s better to provide a $10k raise than a $10k bonus. Everyone remembers their salary. They sort of forget the bonus in a week or two. Even if it’s a better deal (because you get a bonus all upfront).
• Profit-Sharing and other complex mechanisms to increase comp have value. But they don’t work as retention vehicles, or at least, are not really highly valued post-hiring. No CEO I’ve talked to that has implemented profit-sharing got the retention or employee NPS benefits they’d hoped for. That includes us. Profit-sharing and similar programs can help for recruiting (new hires love the idea of profit-sharing), but in practice, anything much more complex than a raise is tough for most employees to fully value.
• You have to be fair. And relentlessly remove bias. Everyone knows who is overpaid and underpaid. Are you sure you pay women as fairly as men? How about other less represented groups of employees? Are you sure? They know. Just assume everyone knows how much everyone else makes. That makes your life simpler. And make raises whenever necessary to make things fair. Make them now.
• The best employees truly value additional equity grants. So make them. Your best employees are generally also your top believers. So they really value getting more options and equity. So give them a second, third, etc. grant. Equity doesn’t really work as a retention vehicle for most employees. It won't make them stay longer, or work harder. And most employees won’t make much, if anything, from their options. But the very best ones will care. They are on your mission. Focus the extra grants there. Not for retention. But because they are the ones that will value it, and appreciate it.