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Structuring salaries for your start up

posted by – August 24th, 2012

When your company is growing, you are constrained to pay more,  and so you should focus on return on investment while recruiting. You should take into account the market condition and also the value the recruit is likely to add to your company or brand before finalizing the compensation package.

How much should start ups pay?

A very good question. Again, there’s really no clear formula for companies that are just coming up. Experts though are of the common opinion that much of it depends on the funding (or lack of it) that your start up has received. The second most important factor, they agree, is your company’s expected year of generating its first profits.

The average salary payment is about 75% of what the individual was drawing previously or is capable of earning from the open market. Some start ups may pay as less as 60% on an annual basis and get away with it by offering other sops like flexi-hours, variable pay tied into performance, a year-end bonus perhaps, extra holidays, sometimes even an in-house day care facility for new mothers, even stock options, though the employee may not be senior enough to command it.

Some clever financial juggling by your accountant could even ensure that the take-home pay at the end of the month is even lesser by bi-furcating the compensation into monthly and annual components. This will help you in case of stuttering cash flows.

In any case, no start up can give more than what the potential employee was earning in his previous job.

Employees salaries should grow with the company

This “category” of employees need to work out a time table where compensation is concerned. Obviously, in the gestation period, partners or founders may have to make do with the bare minimum wages. They need to fix this period, which is also tied in to their company’s business plans. The company grows, so will their compensation packages, that is the logical dictum. If the first is not growing, it means something’s not working out right, which could also be because of a partner’s inability to deliver the goods, which I turn means he does not deserve a pay hike anyway, going strictly by the performance criteria.   

Link wages to their results   

“Your people should be made accountable, should be tied to results, and the wages should be linked to the business they get to the table. They should know that if they perform better, they will get more money at the end of the month,” says Binno M Joseph, CEO, The HR Practice Pvt Ltd.

“In a small company you cannot spend too much on your wage bill, you cannot be magnanimous with salary payments. For you, the entrepreneur, every rupee counts,” Joseph adds.         

Fixed vs Variable pay

The pay package should be a mix of fix and variables based on performance, advise almost all HR experts. By and large, one thumb rule that may be applied across almost all sectors is – junior employees who have very little influence to determine your company’s fate should get 90 percent fixed pay and the rest as variable. Earlier, this category would receive a fixed, 100% salary at the end of the month, but nowadays, the variable component of a salary has become the norm. So, the fixed versus variable percentage depends a lot on the employee’s seniority and his deemed role in your enterprise.

“Even of the variable pay component, about 90 percent should be tied in to an individual’s performance while the rest should be on the overall performance of the company,” adds Joseph.

However, as you go higher up the employee structure, this formula starts changing. So, for a CEO, the compensation should be mostly tied in with the performance of the company. While every company is free to decide the fixed to variable salary ratio for its CEO, the thrust should be more on the variable component and less on the fixed part.

In the variable portion for a CEO, as much as 90 percent can be linked to the overall company’s performance and ten percent to his own personal performance.

Check the market scenario

While deciding on the wages, a lot also depends on the market scenario. You must try to find out and quantify the value of the person based on his experience and the potential he has.     

“Competitive factors also a play a crucial role while fixing someone’s remuneration. You have to find out the person’s market value. For example, if you value him/her at Rs 8 lakh per annum and if he is in sales, you should give a fixed salary of Rs 3 lakh and the rest (Rs 5 lakh) as variable with a 5 percent commission on Rs 1 crore revenue target,” suggests Amit Grover, CEO, Nurture Talent Academy.

Generally in target oriented environments, up to 40 percent can be variable. Often people take home more in such a scenario versus fixed salaries. “Hire if you really need that employee. Also, variable salary is a better option than making the entire salary as one fixed amount,” says Asif Khan, promoter & MD, FabTech Technologies.

In the manufacturing sector, 15 percent of all revenue should go towards employee compensation while in case of Information Technology, it should be as high as 40 to 50 percent of the total revenue, say some experts.

Here’s a quick check list before you fix salaries:

>  Hire only if you truly need the person for that role >  Consider market conditions >  Go for a mix of fix and variable pay package across all sections/departments >  Part of the wages must be linked to performance >  Stock option only for senior staff or if you are running a start up >  At the junior level, variable component to be between 10 to 15% >  Middle level: 20 to 30 percent variable >  Top level: 70 to 80 percent variable >  CEO: As much as 90 percent can be variable because of the high remuneration