The best talent will usually command the highest compensation. If you are not prepared to reward employees with an equity stake in the company, you need to be prepared to compensate them well. Although the best human resources want high salaries, the opposite is not always true: high salary demands do not necessarily mean the best human resources. Here are some personnel strategies for reducing salary expense:
- Young talent. Sometimes you can find young, relatively inexperienced talent who can do a fantastic job for the company. It is a win-win: they gain experience, you make use of their talent and it doesn’t cost you much. Just make sure you plan to eventually reward the ones that work out well . . . or you will lose them.
- Performance-based compensation. Another way to reduce your payroll expenses and to reward your employees is to tie their compensation to performance. This works especially well with sales personnel with commissions (tied to sales) and executives with bonuses (tied to revenue targets, profit targets, etc.), but can also work for other personnel for meeting milestones and other performance-based metrics. I prefer for a large percent of such compensation to be tied to company-based performance rather than individual-based performance; this motivates teamwork rather than self-interest.
- Equity. A strategy I have used in many start-ups is to offer employees a fairly large ownership position in lieu of high (or even market-competitive) salaries. This way the company can attract the absolutely best talent, employees remain highly motivated because of the potential upside if the company does well, but the company does not become cash-strapped trying to meet payroll. The question becomes how much of the company is a “fairly large ownership position?” As a general rule, I like to plan up front to allocate a third of the company’s equity for employees, but no hard and fast rules exist; the more loyal and dedicated you want your employees to be, the larger the equity stake should be.
The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle or paperback formats at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.