Homebrew advises startups to adhere to a simple philosophy around compensation increases or raises. Unless an employee’s job changes, his or her salary shouldn’t change. Raises should be given when there is a promotion or change in scope of someone’s role.
If someone is coming from a larger company, they may expect an annual raise regardless of performance or promotion (anywhere from 3-5%). Make sure you set expectations accordingly early on and be clear with employees that raises are tied to promotions and/or changes in scope of role.
Are there exceptions?
Of course. If someone is taking a large cut in base and/or bonus when hired, salary probably needs to be revisited when the company raises additional capital (typically at the A or B round). Make sure you do this for all employees who are under market and be consistent using salary bands targeting the 50th percentile for base salary.
Employees in non-revenue generating roles (everyone but salespeople) will likely not have an individual or company bonus as part of their compensation plan. Startups are usually cash constrained and employees are rewarded with equity, which is a longer term incentive. Once a company becomes profitable, then it is time to set up a company wide bonus plan.
There are several reasons why companies implement bonus plans and many early stage companies put it off as long as possible. Bonus plans require a lot of paperwork and maintenance. There is always the risk of employees getting overly focused on the actual bonus rather than what is really important.
There is no magic employee number or stage in financing when companies decide that it is time to put in a bonus plan. It is different for each company and ties back to its general philosophy around compensation. Companies may put a bonus plan into effect to remain competitive in the market for recruiting purposes. For example, a company needs to make up for a gap in base salary and a bonus plan can help close gap this with additional cash.
Bonuses are a great way to reward strong performers. A bonus plan is usually tied to a rating system and the strongest performers expect the highest bonuses. Until a refresher grant system is in place, a bonus plan may be a way to incentivize employees.
Bonus percentages are usually tied to level and weighted by individual performance and company performance. The more senior the employee, the more heavily weighted the bonus is on company performance. For example:
| Employee Performance | Company Performance | |
|---|---|---|
| IC | 90% | 10% |
| Manager | 85% | 15% |
| Director | 75% | 25% |
| VP/SVP | 50% | 50% |
| C-Level | 0% | 100% |
Here’s what a rating system of 1-5 looks like.
Bonuses are usually paid out at end of year after an annual review. However, since we recommend ongoing reviews and continuous feedback, you can pay out bonuses at the time that works best for financing/budgeting. Some companies break things up and pay 75% of the bonus in January and the other 25% in July. This is seen as a retention tactic in addition to a budgeting strategy.