Recently, I stumbled upon some Reddit threads where employees vented about the chaos surrounding payroll in some startups where they have worked.
The stories often shared a similar theme — an attraction to insanely high salaries. Although they were initially thrilled to earn well above what their peers made in other companies, the thrill quickly went sour as the businesses struggled to make revenue, resulting in consistent salary delays and the company eventually running out of funds.
While not the same for all cases, startups that pay insanely high salaries do so because they secured funding and the leadership believes the salaries are necessary to secure the talent they want.
As Princess Edopkayi, an HR professional, Co-founder and COO of Spurt! pointed out during a chat on the Modern Workplace Conversations podcast, a workforce with disproportionately large paychecks, unaligned with the company’s cash flow, yet to generate revenue, and largely depending on investors' funds, is a disaster waiting to happen.
Many times, the allure of high paychecks could be a ticking time bomb.
According to Edopkayi, people ignore this seemingly obvious error that is a sign of a startup's death because of a knowledge gap about the factors that influence pay structures.
Key concepts that should influence pay structures
Edopkayi believes that the startup environment can be extremely volatile, and thus, requires proactive, and not reactive measures.
When building a pay structure within a startup, sustainability, fairness, and competitiveness should be the guide. Other critical factors must be hinged on these three.
Don't ignore market rates; do your research
Edopkayi emphasised the importance of considering the market rate for similar roles within the industry. This should be done for every role in the organisation. This element is key in determining what is competitive.
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Researching industry standards and conducting salary surveys are crucial steps to understanding what is obtainable in the market.
Responding to the challenge of accessing the required data, the HR expert said it is not as difficult as people think.
"I have personally used salary surveys to get compensation benchmarking to understand industry standards. I have a few friends in this industry who I can ask, 'What do you pay your interns? What do you pay your analysts?' So, when you gather your outcomes, you can benchmark, or maybe get an idea."
Stressing the importance of employees not being held back by the perceived unavailability of data, she said, "Nobody's hoarding information these days. Data is everywhere, even though there might not be a consolidated database. I've been a part of a community of startup founders; trust me, they are willing to help you."
She also suggested using platforms like Glassdoor and LinkedIn.
By aligning your pay structure with market rates, you ensure that your offers are competitive and attractive enough to retain talent.
Avoid compensation bias to promote fairness and prevent conflict
"Ensure people on the same level and with the same responsibilities within the organisation are compensated equally, not because of their gender or something not relevant to the discharge of their duties."
Edokpayi calls this 'Internal Equity', which is a vital consideration. Enforcing this is key to maintaining fairness within the company.
She explains how fairness is not just a moral obligation but also a strategic move to prevent internal conflicts because employees have conversations with each other. And when they discover disparities in pay that are not justified by differences in roles or performance, it can lead to dissatisfaction and disengagement.
Align pay with role complexity
Ideally, individuals should be compensated according to the value they bring to the business rather than arbitrary factors like job titles and situational incidences.
Edopkayi suggests that pay should be closely aligned with the complexity, skills, qualifications, and the kind of expertise required for each role.
"Job evaluation methods are a very good way for you to determine the appropriate pay for different roles, so you understand how the person's responsibility, skills, or expertise fits that particular role."
Ignore budgeting at your business' peril
Financial sustainability is probably one of the most overlooked, yet crucial factors in establishing a pay structure.
Irrespective of what industry benchmarking suggests, Edopkayi wants founders to "ensure that the structure is sustainable within their companies' financial constraints."
Here, she warns against the common pitfall of overcompensating employees without considering long-term financial viability.
"That is what has killed a lot of startups. When you end up overcompensating, you're hurting your business. One person comes in, you are not making up to $1,000 in a month, but you are paying that person $800. What's going to happen to other people on the team?"
Balancing attractive salaries with the company's profitability is essential to avoid creating a financial burden that could jeopardise a startup's survival.
Choose performance over sentiments when it comes to promotion
Performance and experience should play a significant role in influencing pay structures, especially for existing employees. Recognising and rewarding performance ensures that employees feel valued and appreciated, which is crucial for fostering loyalty and long-term commitment.
"Performance always influences promotion. When you reward them for their performance, they will be happy and want to stay longer in the organisation because they know they are appreciated."
Bonus: Economic factors
When building a pay structure, the business should not ignore the current economic situation. This puts into context the need to be flexible with the structure. Inflation rates and cost of living are reasons that influence consistent salary reviews. Edopkayi shares how it works at Spurt!
"To ensure that we are competitive at Spurt!, we combine all of these. In fact, recently we just did a competitive benchmarking with current salaries and we try to review salaries every year. Aside from equity, company budget, and responsibilities and qualifications, we also look at economic factors.
“We have to consider that to meet the needs of people because people work from home; they need to pay for the Internet and their gadgets. A lot of things come into place when you're building your structure."
Labour is the real cost of doing business
Operational expenses often come to mind first when the term "cost of doing business" is mentioned probably because they can use up to 80% of a business' revenue inflow. Labour costs further take a large chunk of overall operational expenses. This explains why a company's immediate move during a downturn or bad market run is reducing labour costs.
When a company gets hiring wrong and has a high turnover rate, labour costs are difficult to maintain because of the cost of replacing talent.
Are we overspending on labour?
This piece by Techpoint Africa explored how to decide what fraction of the company's gross revenue should go into remuneration and what to do if it exceeds the dedicated amount. At such times, decisions are often made to cut salaries or strategise to come up with new income streams.
However, Edopkayi wants founders to pay attention to comprehensive benefits, an often overlooked part of remuneration.
This can largely be achieved by being statutory compliant and understanding what the workforce needs before making decisions that will affect them. Customisation is key because every company is unique.
"It's not about just having a salary, you can also have a well-rounded benefits package. This could include health insurance, retirement plans, wellness programmes, growth and development, and a strong company culture."
Edopkayi expressed optimism that the Nigerian startup industry is heading into a period of pay transparency and pay equity and believes people would begin to be open about their pay.
"One particular trend I see coming up is people being paid based on their actual performance; being paid based on milestones. Organisations should have OKRs, KPIs, and the like. They should pay based on the realistic goals that employees have met. That's where I think the workplace is going."
