A Complete Guide to Employee Compensation for Startups

Your employees are probably one of your startup’s most valuable assets. They deal with your customers, make sales, and ensure that all your company’s processes run as they should. Ultimately, without them, you’ll be unable to generate any revenue and grow your company.

Considering this, it makes sense to compensate them properly for the work they do and the value they contribute to your company. And for this, you need a fair, equitable, and effective employee compensation plan that will help you motivate your employees, increase their job satisfaction, and make them more productive.

Creating such an employee compensation plan can require significant time and effort, but the benefits justify this.

Now the question is: Where do you start…?

In this guide, we’ll take a look at employee compensation for startups in more detail, what you should consider, and how you can create an effective employee compensation plan for your company.

What is employee compensation?

When asked what employee compensation is, most people will often answer that it's an employee's salary. And, to a certain extent, they’re right. But it goes further than this, and employee compensation involves more than just a salary.

Compensation is the reward paid to a specific employee for the work they do and the contribution they make to a company. So, compensation includes their salary, bonuses, perks, vacation time, healthcare, and the like. Considering this, compensation can be both monetary and non monetary. With a competitive compensation, companies can attract and retain the best talent

When defining employee compensation, it’s also important to distinguish it from benefits. These benefits are non monetary rewards given to employees. So, while it might not mean money in their pockets, it could mean a better work environment, which is a valuable tool in a company’s arsenal to attract the best talent and benefits can help companies motivate their employees even further to perform better.

Different compensation models

Now that we’ve recapped what compensation is, let's look at the different compensation models you can use to compensate your employees for the work they do.

Here, you’ll typically find three models – salary, hourly, and commission based. Although each of these models can be effective, the model you choose will, to a large extent, depend on your company's specific circumstances and requirements.

Salary

By now, you know that a salary is a fixed amount you pay every month to an employee, regardless of how many hours they work. A typical example is where you pay an employee a salary of £2,000 per month for a normal workweek which then amounts to a yearly salary of £24,000 per year.

In addition to this, you’ll typically pay bonuses and employees will get additional benefits like leave days, retirement benefits, healthcare benefits, and so on.

Hourly

In contrast to a fixed salary, an hourly compensation model involves that you pay employees only for the hours they work. For example, if you appoint an employee at a rate of £10 per hour, you'll pay them £80 per day if they work for 8 hours. Likewise, they’ll earn £400 per week and about £1,700 per month if they work a normal five-day workweek.

When it comes to hourly compensation, it's important to note that you’ll typically not offer employees any of the benefits enjoyed by salaried workers. From a company's perspective, employing employees on an hourly basis can mean more administration and management.

Commission based

Finally, you can employ employees and offer them commission-based compensation. This will typically be the case where you sell a product or service to customers, and employees will then earn a commission on every sale they make.

Here, you have several models to choose from. For one, you can compensate your employees using commission only, or you can pay them a base salary and a commission component. In this way, they'll be sure that they earn something every month.

For example, you can pay your employees a base salary of £500 per month and a commission of 10% on every sale they make. If they then make sales to the value of £5000 for the month, they’ll earn £500 as commission. In addition, you can also pay them additional bonuses and incentives to reward exceptional performance.

Why is employee compensation important for your startup?

We've now seen what employee compensation is and what employee compensation models you can choose from. Let's now look at why the right employee compensation is important for your startup.

Increasing employee motivation

When you compensate your employees properly, it shows them that you value the contribution they make. And when they know this, they feel more valued and will be more willing to give their best and perform better. As a result, they'll be more motivated.

By motivating your employees, you’ll also get to enjoy another benefit. When your employees are motivated, it will increase company morale, which then means that your entire company, as a whole, will perform better.

This is an especially critical consideration when you're paying bonuses, incentives, and commissions to your employees. These can serve to increase their motivation even further, which means your company will perform better, make more sales, and generate more revenue.

Increased productivity

Another benefit of a motivated workforce is that your employees will be more productive. Think about it, when your employees know they’re valued, and they're motivated to perform better, there’s no question that they will be more productive and efficient.

Simply put, they'll do more in less time. And when this happens, you’ll reduce your costs, be able to serve your customers better, and increase your revenue and profits. Moreover, as we’ll show herein below, the right compensation increases employee retention.

This means employees will stay at your company for longer. Flowing from this, they will gain more experience in your processes and operations, which makes them even more efficient and productive.

More job satisfaction

The right compensation, which includes a competitive salary and appropriate benefits, increases employee satisfaction. This is simply because it shows them their contribution is valued and everyone likes to be appreciated. This is even more so when employees’ compensation is tied to company performance. In this case, they know that if the company succeeds, they succeed.

This results in better teamwork and more efficient collaboration, which, overall, has the ability to make a company more productive and profitable.

Increased employee retention

Job satisfaction goes further than just increasing company performance, though. Apart from performing better, satisfied employees will also be less likely to look for other jobs, or even worse, leave the company. Simply put, they’ll be more loyal.

As a result, with the right compensation, you’ll be able to retain the best talent. This, in turn, has several benefits. For one, you’ll ensure continuity and consistency, which makes for a more cohesive and efficient team. In addition, you’ll save costs because hiring can come at a significant expense, both in money, time, and effort, which are all valuable commodities for any startup.

Attracting the best talent

If you’re able to offer your employees a competitive compensation, you’ll be able to attract the best talent to your company. For obvious reasons, employees will want to work for companies where they’ll be paid the most.

In addition, with the right compensation package, your employees will, as mentioned earlier, be more satisfied. In turn, this leads to them becoming promoters for your company, which strengthens your attraction for future employees even further.

Getting it right

Now that you’ve seen what the right compensation package means to your startup, you’re probably ready to develop a compensation plan of your own. With that in mind, let’s look at the steps you’ll need to follow to do so.

As always, these steps serve as guidelines that you can adapt to your startup’s unique circumstances, and you shouldn’t see them as hard and fast rules you need to follow.

Develop your compensation philosophy

The first step in creating your compensation plan is developing your compensation philosophy. Ultimately, this forms the basis of a compensation plan that is fair and equitable while still motivating employees to perform at their highest levels.

To develop your compensation philosophy, you’ll first need to consider what you want to achieve. In this way, you’ll be able to determine what behaviours you’ll want to encourage through a proper compensation plan and what the best approach will be for you to get the results you want. As such, you’ll consider what type of compensation you’ll pay, how you’ll structure it, and how employees’ performance will be measured.

Based on this, you’ll then be able to create a compensation plan that aligns with your company’s goals and supports its operations.

Do your research

The next step is to research market trends and conditions. The insights you’ll gain from this research will show you how you can position your company in the market and what compensation you should offer to attract and retain the best talent. Fortunately, when doing this research, you’ll have many resources you can use, from job boards to salary surveys and platforms like Glassdoor.

Ultimately, this research will be the first step in showing you what the market is paying for certain positions and what you’ll need to pay. Keep in mind, however, that these are just estimates, and you’ll likely need to adjust them up or down to factor in aspects like company size, location, and so on.

Benchmarking

Once you’ve done your research, you’ll need to benchmark the data you’ve found to the positions within your company. To do this, you’ll typically compare external positions to your internal positions using job descriptions, the job’s function, and by using specific positions that align with your company’s operations.

At the end of this exercise, you’ll be able to establish how your pay rates compare to the market. As such, you’ll know if you need to increase your compensation to stay competitive. Once again, keep in mind that you’ll need to adjust the figures to factor in location, company size, market segment, and more.

Creating job descriptions

The next step in the process is to prepare extensive job descriptions for every position in your company. Here, you can consider the descriptions and compensation for external jobs you found during your research.

During this process, you’ll set out the roles and responsibilities for every position, and you’ll create a job title for every position in your company based on similar positions in the market and your internal company policies. When positions share similar responsibilities and functions, you can also merge these positions into one.

Creating your pay structures

For the next step, you’ll create your pay structures. To do this, you’ll first create job grades for every position you create during the previous step. These job grades are a series of similar jobs, and they allow you to compensate employees who have the same functions similarly. They also give you a mechanism to implement promotions between job grades.

Through your research, you’ll also know what a market related compensation is for these job grades. Based on this, you’ll then create pay ranges for every job grade. This is a more preferable approach because pay ranges help you tailor your employees’ compensation according to their education, experience, and performance. In addition to the pay grade, you’ll also need to determine the benefits that you’ll offer to every employee in a specific pay grade.

Measuring your pay structures against your costs

Once you’ve established your pay structure, you’ll need to determine the costs of the pay structure. In other words, you’ll need to determine how much it will cost your company to implement your compensation plan. This is simply because your compensation plan has a direct impact on your company’s bottom line.

Once you’ve established the costs of our compensation plan, you’ll be able to see how it aligns with your company’s current and planned financial position. Based on this, you can then make any adjustments if necessary. Here, it’s a balancing act that requires you to find the best approach to make the compensation plan sustainable while still enabling you to retain and attract talent.

Documenting your plan

When your compensation plan is completed, you should document it. Ideally, you should get input from your employees when creating the plan and their feedback once it’s done. In this way, you’ll ensure that the plan is fair and equitable to all your employees. In addition, it will serve as a future reference when you want to make any changes or improvements.

Once you’ve documented your compensation plan, you should also be completely transparent. In other words, your employees need to know what they’ll earn and what they need to do to earn it. For example, when you use incentives as part of your employee compensation plan, employees should know what these incentives are and what’s required to qualify for them.

Implementing and evaluating the employee compensation plan

When you’ve finished developing your employee compensation plan, the time comes to implement it. It doesn’t stop there, though. You should continuously monitor and review your compensation plan. This will allow you to see how it works in practice and gives you the ability to make improvements or changes to aspects you might not have anticipated when you developed the plan.

Moreover, market conditions change and evolve over time. So, reviewing your employee compensation plan allows you to make changes to align it with prevailing market conditions and determine whether it still serves your business operations as it should.

Ideally, you should review your employee compensation plan every two years, but you can consider reviewing it more frequently if circumstances and market conditions require this.

Getting it wrong

We’ve now shown you the steps you’ll need to follow to ensure that your company has a fair, equitable, and effective compensation plan. In other words, we’ve shown you how to get it right. Let’s now look at how you can get it wrong.

Here, some of the most significant challenges you’ll encounter when you get it wrong include:

Not being able to retain employees

This is one of the biggest challenges you’ll face when your employee compensation plan is not effective. One of the most prevalent causes for this is not developing a compensation plan that’s competitive in the market. In other words, it happens when your employee compensation is too low, or it doesn’t offer the benefits your employees can get at other companies. The single best way to prevent this is by doing proper market research to establish what your competitors are paying their employees in similar positions. Moreover, as mentioned earlier, it’s crucial that you consistently review your employee compensation to stay competitive and current with the market

Reduced productivity

Reduced productivity is often a result of paying your employees too little. This, in turn, leads to a decreased focus on their work. Understandably, the best way to combat this is to pay your employees a salary that affords them a normal standard of living. There are, however, some other strategies that can be helpful here. For example, if you want to offer benefits, use your employees’ input to determine what benefits you’ll offer and which will be of most value to them. In this way, you’ll avoid investing in benefits that don't provide much value or contribute to your employees’ quality of living.

Not having a fair employee compensation plan

This is one of the biggest challenges you’ll face if you don’t plan and execute your employee compensation plan properly. And if your plan is unfair or your employees perceive it to be unfair, their morale, motivation, and productivity will suffer. As mentioned earlier, one of the best ways to eliminate this is by involving in the process of creating a compensation plan. Moreover, once implemented, being completely transparent will alleviate any assumptions they have and assure them that your employee compensation plan is fair, just, and equitable.

The bottom line

To ensure that your company can attract and retain the best talent, it’s crucial that you have an effective, fair, and equitable employee compensation plan in place. When you do, your company will be more efficient, your employees more productive, and you’ll be able to serve your customers better and generate more revenue.

Hopefully, this post helped illustrate the steps you’ll need to follow to create an effective employee compensation plan for your company.

How Accountancy Cloud can help

Once you’ve implemented your compensation, you’ll need to properly account for it every time you pay salaries to your employees. This can be time-consuming, and without the help of a certified accountant, you may struggle to manage everything, especially if you’re a startup that doesn’t have any set processes or procedures in place.

One thing that can help you alleviate the burden is online accounting. It adds a level of autonomy to your processes which means you can accurately record and keep track of data, therefore removing the risk of human error and any financial penalisation that may be incurred from such.

At Accountancy Cloud, we take pride in our industry leading online accounting services. Our team of financial experts and accounting software make it simple to track invoices, manage cash flow and automate payroll.

With Accountancy Cloud, your 2022 accounting is made simpler! If you need more guidance on accounting for your employee compensation, please contact us to learn more about how our accounting software can help you.