Five principles for how to structure startup compensation

Edited excerpt from eShares 101 by Henry Ward:

1. Compensation (salary + equity) is determined by the market for your skill set, and your skill level. That means there is no automatic annual raise of 2.4%. There is no subjective increase based on whether your manager likes you better than the others. Your compensation is exclusively determined by your marketability.

2. Increase compensation by increasing marketability. Lobbying, staying late, taking credit, buying beers — these have nothing to do with your compensation. If you want to increase your compensation, become better at what you do. It is very simple. The rest is noise.

3. You will be marked-to-market at your 9-month anniversary and every 12 months thereafter. If the market for your skill has increased in value, or your individual skill has increased, your compensation will increase. Similarly, if the market value of your skill set has decreased or your skills have atrophied, your salary will adjust down.

4. We target being in the 75th percentile for your compensation. That means if you were to interview elsewhere, we would expect 1 in 4 companies to offer you a higher salary than us. Why don’t we just pay top-of-market?

5. We earn our people. The best people are recruited, not bought. The companies who pay top-of-market will always win the salary-optimizing people. The best people optimize to learn. Winning and retaining those people means creating an environment where people are willing to trade short-term compensation for long-term career capital. Many companies think paying the most gets them the best people. They are wrong. Companies that teach the most get the best people. Our compensation structure is our checksum to ensure that we offer the best learning environment.

Notes:
(1) Henry says that these principles are drawn from Netflix (presentation here) and Mark Suster’s Learn vs. Earn. The Netflix presentation also had a huge impact on how we think about compensation at Seeking Alpha.
(2) Note the balance between paying people well (75th percentile) and not targeting “salary optimizing people”. Do you think he gets the balance right?

One thought on “Five principles for how to structure startup compensation

  1. Are there any people who (despite their insistence to the contrary) are not “salary optimizing people”? Why does he assume that there are companies in all percentiles that provide great learning environments AND top salaries.

    His approach is sound: he thinks he can get people he needs with this approach. And he’s probably right. But the system he constructs to assert that his way is THE BEST WAY sounds like spin.

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