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.

(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?

Commission plans — how to get them right

From Commission plans by Fred Wilson:

The killer commission plan starts with two critical questions:

What do you want to sell? Existing products or new products? Services or software? More revenue or higher margin? Answering these questions up front matters.

How do you want the team to behave? Do you want new accounts and new business or more business from existing accounts? If you want new accounts pay for hunting, if you want them to work the accounts you already have, then pay for farming.

The key is to sit down with finance, product and marketing with the budget in hand and ask the questions; what do we need to sell by the end of the year? How much revenue do we need? How much margin do we want? How many new customers do we need? Once these questions are answered, incent the sales team to do exactly that.

Once the incentives have been nailed and properly aligned, make the plan dead, stupid, simple. A plan is simple stupid if a sales person knows exactly what they will be paid on a deal without looking it up.

In addition, all plans must have accelerators. Accelerators are when more commission is paid for a deal after a certain threshold is met, usually quota. Finally, and most important, once the plan is done DON’T MESS WITH IT.

(1) Andy Swan commented: “Embrace the idea of salespeople making more than you do”.
(2) Thank you Eran Ben-Shushan, co-founder of Bizzabo, for the recommendation.

Should you pay your employees to quit?

From Jeff Bezos’ 2014 Amazon shareholder letter:

The second program is called Pay to Quit. It was invented by the clever people at Zappos, and the Amazon fulfillment centers have been iterating on it. Pay to Quit is pretty simple. Once a year, we offer to pay our associates to quit. The first year the offer is made, it’s for $2,000. Then it goes up one thousand dollars a year until it reaches $5,000. The headline on the offer is “Please Don’t Take This Offer.” We hope they don’t take the offer; we want them to stay. Why do we make this offer? The goal is to encourage folks to take a moment and think about what they really want. In the long-run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.

What’s wrong with stock options

From Untangling Skill and Luck by Michael Mauboussin:

Ideally, a compensation program pays an individual for his or her skillful contribution toward achieving a desirable objective. In reality, many compensation programs pay for randomness. One prominent example is the use of employee stock options (ESOs). While ESOs seek to align the interests of managers and shareholders, a worthy goal, in reality they largely end up remunerating for randomness. Consider the 1990s, when stock prices soared to lofty levels. Executives with ESOs made substantial sums, even if their relative performance was poor. Likewise, executives who led their companies in the 2000s did poorly with their ESOs. In determining the ultimate amount of pay, the vagaries of the market overwhelmed the performance of the executives. Compensation programs need to be modified so as to strip out as much randomness as possible.