Dollars and Sense: A simple model for negotiating salary with startup executives (and everyone else)

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I recently read a blog post by the CEO of a startup. His message was simple: “If you can’t accept the fact that you will make less at our company to be part of something great you probably won’t be a fit for our culture.”  This ludicrous assumption made me think about the very real challenges founders face when it comes to paying top talent.  Being part of a growth story is exciting - that said, excitement doesn’t pay the bills.   As startups mature they start targeting candidates with greater experience.  These candidates are motivated by the “soft” stuff – the opportunity to learn, the experience, etc.  They also tend to have a mortgage or kids planning on going to college.  What is a CEO to do?  Ignoring a segment of candidates that could be transformational to your business is irresponsible.  Rather than ignore these high performers there are a couple of steps that CEOs can take to ensure compensation isn’t a barrier.

Step 1:  Clearly define the role and Take the time to do a market scan for salary data. 

Stay away from online national salary surveys.  In our experience they overestimate compensation by anywhere from 10-20%.  Go with a local resource that focuses on your market - this task is made easier in Chicago where the Illinois Technology Association releases an annual salary survey that specifically focuses on growth stage technology companies in the Chicago area.  If you aren’t lucky enough to live in Chicago take a look at Glassdoor or some of the free tools offered by Google.   If, at the end of this process, you find that you are priced out of the market it’s time to decide – hire someone more junior or find a way to make the investment.  Whatever you do don’t hire a more junior person and give them a C-level title.  You will regret it when you are finally ready to hire their boss.

Step two: Have the conversation about compensation with candidates EARLY and OFTEN.

 At IAR, we generally bring up compensation at the end of the very first interview.  You can do this tactfully and with respect:  First, set the stage - tell candidates at the beginning of the interview that you will discuss compensation during the conversation.  Second, be direct.  Let them know that your discussion about compensation at this stage is driven by a desire to avoid wasting time.  Third, show your cards first.  Let the candidate know the range you have decided on.  For instance, if you are a small software company in Chicago looking for a CFO, the conversation may go along the lines of: “Based on our research, we are targeting an annual base salary between $190,000 and $210,000, a bonus target of 15% and a meaningful equity package.  Is that in line with your expectations based on your current compensation?” 

One of three things will happen:  1.  The candidate will divulge their compensation to you, your range will be lateral or a step forward and you will agree to pursue the opportunity.  2. The candidate will be above your salary range and you will need to decide if the conversation is worth pursuing, or 3. You won’t be interested in a second interview with the candidate so the data won’t matter.  I know some of you are thinking “If I go first, and they are making less I could end up paying them more than I need to!”  The counter argument is simple – if the market is paying a certain amount and you hire them for less, the chances of them looking for a new role after a year (or less) with you is very high.  Better to match market rates and keep good people than try to save a few thousand dollars in the short term. 

Anyone who has recruited an executive at a growth stage company will quickly notice that I have left off a conversation about equity during the first conversation.  We generally avoid going too deep on equity right away.  Believe it or not, we have found that most people (yes, even executives) don’t know their equity value off the top of their head.  Rather than have them guess on the first call (which usually leads to overestimating), we ask candidates to come back to us in the second interview to discuss their current equity position and our equity target. 

Step 3:  review a sample offer before you make the final decision. 

We generally recommend doing this after the candidate is close to the final stage of the interview process.  Again, prepare your candidate - let them know that, if things go well, you will want to discuss the terms of a potential offer.  Be clear that this is an exercise in alignment and not a formal offer.  Using the same CFO example, the conversation should go something like: “The team’s reaction was great, we are close to making a final decision.  Before we go down that path I want to discuss what the offer will look like if we get to that stage.  If you join our company, your base salary will be $200,000 annually, with a 15% bonus target and an equity stake of X shares/options currently valued at Y.  Is that an offer that you would feel comfortable accepting should we get there?”

Our message is simple:  First, just because a candidate has a hard line on salary doesn’t mean they won't be amazing.  Second, savvy candidates know what the market is paying – you should too.  Once you know what a position will cost you can make an informed decision about making the investment instead of wasting your time trying to find a great person at a discount.  Third, communication is key.  Compensation is a sensitive topic because we make it that way.  If you are open with your candidates about compensation in the first conversation and stay consistent you can save a lot of time and avoid a last-minute scramble to negotiate.

Up next:  Getting the most out of your interview process.