LGT Magazine: How startups incentivize employees
Money is important but it’s not everything. There are other motivators startups use when trying to hire and maintain talent.
Startups aren’t usually known for having huge budgets. Fledgling companies can’t always attract top talent from industry giants with deep pockets. At least not salary alone. So how can startups even the playing field?
Fortunately, money is not the only incentive. Founders don’t start a company for money alone. Similarly, startup employees aren’t incentivized by monetary compensation alone. Many people gravitate to startups because there is an opportunity to take on a broader set of responsibilities. They also like to be part of something exciting.
“It is cool and intriguing to be part of a startup, especially a tech startup,” said Deanna Baumgardener, founder of Employers Advantage, a boutique human resources firm that focuses on hiring for small businesses and startups. People have seen tech startups become huge successes and want to be part of that.
“That’s a great incentive for employees when you can’t provide huge salary,” she said.
A startup mentality
Startups have potential, but there’s also a flipside: volatility. Startup employees need to believe in the company and not be discouraged by the uncertainty surrounding it.
Derek Webster, founder and CEO of CardFlight, a fintech startup, said he looks for collaborative, persistent individuals with a strong belief in continuous improvement. He also looks for employees who come from companies with 50 to 500 employees because they’ve seen the types of changes that CardFlight will encounter in its next stage of growth.
“We need to pick the battles we can win. We never had the most resources; we were always the scrappy underdog. If we get into a bidding war for talent, we’re going to lose,” Webster said.
Instead, CardFlight competes for talent by allowing people to have much more impact on the day to day running of the business. Whereas few individuals at large companies can make a difference to the bottom line, startup employees can make a difference.
To measure impact, Webster said they take pains to ensure everyone understands the company’s goals and KPI. “We are transparent about metrics so that they can see the entire picture of the business,” he said.
While that’s appealing to some employees, it’s not for everyone. Sometimes people are “too corporate” and realize they prefer the stability of a 9 to 5 job once they join, said Katherina Lacey, co-founder of Quincus, a Singapore-based logistics startup.
“Not everyone can deal with roller coaster ride of uncertainty,” she said.
Cash as a motivator
Monetary compensation is probably the most frequently used motivator. But studies show that even though money is important, employees need more than compensation. Studies show there is a weak relationship between salary and job satisfaction.
So if money isn’t the motivator, what is? Studies show that recognition can go a long way. Autonomy is also a motivator, as are feelings around fairness. The most common reasons people leave jobs are because of management, lack of recognition, company culture and lack of growth opportunities.
“It’s definitely not only about money because not everyone is motivated by money,” said Baumgardener.
But what startups can’t offer in salary, they can make up in other ways.
“They might have less of a base salary, but they have more potential upside,” said Sarah Riegelhuth, founder of Grow My Team, a recruitment firm based in Australia. Riegelhuth suggests that companies get creative with remuneration. For instance, companies can set the baseline salary a little lower but create the potential for higher pay.
A base salary of $50,000 with an opportunity to earn $100,000 if the employee helps the company meet certain metrics can be more exciting and empowering than offering $80,000 as a base salary without a bonus, she said. It’s essential to tie the business’s growth with the person’s role, she added, emphasizing that she’s found company culture and alignment of interests to be crucial.
Equity is another way that startups attract and keep employees. Stock options help to align employees with a company by giving them a stake. This is especially attractive to early stage startups with limited budgets.
Founders have many considerations when considering this option. There are stock grants, stock options, or stock warrants. Then there’s the question of how much to give and, in the case of stock options and warrants, vesting periods.
Many, or even most startups, don’t last, so equity often doesn’t pay off for employees. But the potential can be tantalizing. Trevor Milton, founder of electric truck company Nikola, recently made good on his promise to give his first 50 employees 6 million of his own shares, now worth $233 million.
Keeping and motivating employees
Given the wild ride that startups are known for, culture can be especially important as a way to motivate employees and get them aligned toward company goals. When a startup is brand new, culture generally reflects the founder’s personalities. But as the company grows, it’s more important to formalize things.
“It’s something you need to work hard at, the culture doesn’t just happen,” said Webster, adding that he took steps to “codify core values” 18 months ago.
Lacey said Quincus has worked on strengthening company culture through virtual events. The current pandemic has pushed many companies toward virtual events, but for Quincus it’s nothing new. The 75-person company has employees scattered in different countries. To encourage collaboration across teams, they’ve had learning workshops about topics as varied as mental health to Bollywood dancing. They also hold regular games and “battles” such as a fitness battle.
“We can’t do a retreat at this point…. but we really go the extra mile to keep people to know each other and know one another, even if in a digital space,” said Lacey.