How Much Should a Startup Pay Its Employees?

How Much Should a Startup Pay Its Employees?

Not paying your employees enough is a mistake that startups should not make.

Employees of a startup are essential to its success. They keep the company running to ensure that the vision gets carried out and that the day-to-day operations continue seamlessly. High turnovers can be harmful to a company, especially for startups with less established internal structures, organizations and systems to mitigate handover disruption. This makes retaining employees a particularly important goal for startups. While employee retention depends on many factors, including location, growth and the work environment, how much you pay your employees is one of the most crucial considerations. 

As a startup, how much should you pay your employees? Unfortunately, this question is challenging due to the limited resources, constraints and challenges that startups face compared to larger, well-established firms. While there are no hard and fast rules, consider the following questions and factors for some clarity on where you should land on that important number:

How readily available is suitable talent? 

It’s crucial to consider the role and responsibilities of the employee as well as the availability of qualified talent in the area. Like any other product or commodity, when there is a greater demand for workers than supply, the wage rate rises, and vice versa. This means if you’re located in an area with many individuals looking for jobs and vying against each other for the position you are offering, you’ve got strong bargaining power. You can afford to pay lower wages for high-quality work. Conversely, if you’re competing with many companies for a limited supply of suitable talent, expect to pay high prices to build your dream team.

What is the employee’s position at the company?

Furthermore, startups need employees that are multi-taskers with a well-rounded set of skills. This naturally stems from the fact that startups have limited staffing, and each person will need to cover a wide range of assignments. Hence, employees capable of working across departments and playing multiple roles simultaneously are particularly precious. Companies tend to pay for value, so it could be worth your while to pay a little more for that multi-talented employee that can cover the job for two.

How profitable is your business? What resources do you have at your disposal?

As we mentioned above, one of the most considerable challenges startups face is the lack of resources and constraints compared to large established corporations. As a startup, you’ll have to work with what you have, and the focus is often on your bottom line and how much cash you have on hand. 

To help you determine how much to pay your staff (and whether you can even afford them!) will depend on your cash position. Therefore, it is imperative to understand your company’s financial flow. While not many startups are profitable from day one, they need to be able to pay salaries at the end of every month without fail. This means that you cannot tie up your cash in future revenue—you’ll need it to pay staff right away. 

Therefore, before making any generous offers, consider not only your profitability but also how much you have on hand at the end of every month.

What are the benchmarks to consider?

When it comes to paying employees in the tech industry, everyone has different values because there are so many variables, says Alex Lewis, a talent manager at European seed-stage VC firm Seedcamp. However, there are still salary benchmarks that startups can use to provide a point of reference to begin negotiations. Do some research to find out how much other similar startups are paying their recruits and extrapolate to determine what would be a competitive offer for your employees.

Is your company offering non-cash incentives?

Sometimes it’s not all about the money. Employees today value non-monetary benefits as well, such as job satisfaction, recognition, experiential rewards, teamwork, friendship and other factors that contribute to a healthy work environment. You can pay your employees less and still manage to attract them if you are willing to offer additional benefits, such as extra paid leave, flexible working hours, remote working days, half-day Fridays in the summer and sabbaticals for certain employees. 

While it’s always a challenge to determine how much to pay your employees, start by answering the questions above. It can give you a good starting point to decide how much to pay your employees so that everyone walks away from the table feeling like they’ve made the right decision. 

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