Salaries are the fixed compensation that you pay to individuals on a routine basis; weekly, bi-weekly, monthly payments are typical examples. Salaries should reflect the relative contributions of each staff member. Determining salaries can be very challenging for many entrepreneurs as payroll expense is usually a large part of your cost base, salary planning merits a strategy that considers several factors:
- Do you want to be market competitive? If you have to steal talent from others, it can get very expensive very quickly. It may be necessary to do so but if you do, make sure you have the margins to support it.
- Do you want to emphasize pay for performance? This idea is the best way to align interests but is also the hardest sell to the people getting paid. Employees would love to be compensated for their time and therefore would like most of their salary as base pay. On the other hand, for the company, it’s a much better investment to base your compensation practices on contributions to the overall success of the company. Like all negotiations, if there is good communication, a balance can be achieved that works for both parties.
- Do you want a higher mix of variable versus fixed compensation? This is the practical version of pay for performance and can save you money as you ramp your business. It has a downside however as the mix has a direct effect on your employees’ appetite for risk taking. Factor this risk appetite into your overall compensation planning process.
Salary management done well can be a huge enabler of success in start-ups. Or, if you do it poorly, it can be a huge disabler. Staff conflicts or harmony can be greatly affected by how you set salary expectations. Managing salary expectations is a fundamental part of building a strong team.