How to Set Starting Salaries
Q: I'm starting a company with two friends. I will be CEO; they will be the CTO and COO. Should we all have equal salaries, or should they be different? I have enough in my budget to pay each of us something in the low six figures.
A: Setting salaries is an art, not a science. I've seen startups work great when each founding partner had an equal salary and equal share of the company. I've also seen startups work when there's great inequity between the partners. The question is: What criteria should you use to set the salaries?
First, salaries shouldn't depend on experience--not in my book. Salaries should be related to management results. Spending 10 years running a company that never showed a profit should command a much lower salary than 10 years spent running a spectacularly successful company in a variety of market and competitive conditions.
But I'd make an exception: At the end of the day, results are only somewhat under your control. If a candidate had managed an unprofitable business but claimed to have very high-quality management and operational processes, that could be a good sign. In that case, I would want very detailed presentations of the management processes, so I could decide whether or not I was willing to bet on those processes in my company.
Salaries shouldn't be set based on a salary survey. In a cash-poor, startup environment, does it makes sense to pay anyone a six-figure salary? Prior to 1996, it was almost unheard of to pay six figures in a startup. You were expected to take a salary around 30 percent below market (assuming that still left you enough to live on) and do whatever it took to further conserve cash.
Here are some more things to consider:
- Are executive salaries your best use of cash? Running a startup is all about cash flow and conserving cash. Salaries in the six figures are high enough so that each of you is being paid about double the salary of a relatively senior non-executive. In a startup, who's more important, the executives or the people executing (note that executives might execute)? If I were running a start-up and could afford six figures in my salary budget, I'd give myself $35K per year and spend the remaining money on two or three high-quality engineers, marketing people and so on. As the founder who stands to get rich if the company succeeds, my short-term cash needs should defer to the health of the company.
- What bets do those salaries demonstrate? Salaries in the six figures are excellent in the United States. Those salaries in your company would signal to me, "These founders aren't betting on the company succeeding. They get a good deal no matter what happens."
- Do those salaries make sense from a financing point of view? Even if you just pay yourselves less and keep the cash as a buffer against a rainy day (hint, hint), giving yourselves lower salaries means increasing your profit, which will make it easier to get financing in the future and make profitability easier to come by. And when or if you ever go public, public companies are typically valued as a multiple of earnings. If you save $1 by giving yourself $1 less in salary, and you go public at a multiple of 20, then you just got back $20 in market value in return for deferring that $1 in salary.
- When presented with job candidates for CEO, CTO and COO, how do you determine their salaries? If you try to argue them down, what arguments would you use? Would other, established companies value these same three people this highly for these same jobs? If not, then you may be overpaying them.
If, however, your candidates have demonstrated the ability to perform at that level, then the salary is probably fine. (Though for cash-flow and bet-signaling reasons, I'd still take it as less cash plus more stock.) But if you haven't demonstrated that you can create $150K of value running something, it would be a very tough sell to persuade me that I, as your investor, should pay you that until you've shown that you're worth it.
- Do those salaries lock you into unfavorable positions politically? If you three get high salaries, you're setting a range for any executive-level person you bring in. It will be hard to hire someone for much cheaper, and someone coming in with twice your experience, even if they're "just" a VP, may feel (and be correct) that they deserve a higher salary than you, based on experience. For the health of the business, you may have to hire them and pay them that--which sets the baseline high and really limits your flexibility. Not to mention, if you're spending $500K on the top three salaries, will you even have anything left over to afford a top-flight management team?
- Whether salaries are the same or different depends on circumstances. Even if a survey says two positions get equal salaries, that isn't necessarily the best decision. From an investor perspective, salaries should be set for the optimal health of the company: Enough to ensure you guys won't starve or be too stressed out about money, but low enough to conserve cash and ensure that the founders share in the same risks the investors are taking.
- Should you set salaries by job titles? The answer is no. regardless of what's printed in his business card, the CEO of a new start-up isn't doing the same job as the president/CEO of a $10 million company. Set salaries based on how much each person is contributing to the firm. But if differing salaries would cause resentment or feelings of unfairness among the founders, then set them all the same. You can't afford that kind of emotional baggage in your working relationship.
You should set salaries for the best working relationship and best business performance. In your shoes, I'd set three moderate, equal-base salaries at about $50K each. I'd want everyone to feel they were treated fairly, and no one to feel they were getting the same or a better deal than they'd get on the open employment market. If you want to reward people for the differences between their jobs, set up a bonus structure related to some combination of personal and group milestones. Keep the overall structure simple (salary plus bonus) and the bonus criteria simple enough so that the motivations and rewards are very clearly connected to each person's contribution.
As the company grows, raise your salaries last. Use the extra money on building infrastructure, hiring people who will accelerate your growth, developing marketing campaigns and forging deals that will give you access to the channels you need. Once the business is healthy and thriving, then you can raise your salaries. If the business is successful, you'll be rich enough so it won't matter. But if the business isn't successful, you'll be demonstrating to investors that you have the ethics and business sense to align your interests with those of the people who put their faith in you.
Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.