What Kind of Compensation is Just Right?

In the early stages of a technology company’s life, the founder usually pays him/herself whatever the company can afford and pays the employees as little as they possibly can. As the company matures, base salaries begin to gel and ranges are established for various levels of employees and their functions. It is at this point that the founders start to formalize their compensation.

As the company moves to “adolescence” and hires senior executives, base salary compensation starts to be coupled with significant variable bonuses. This is where the “fun” starts, so I’ve included some basic rules to guide the process.

Annual vs. quarterly bonuses
Annual bonuses have a dramatically larger impact on employees and their families than quarterly payouts. Quarterly payouts are often so small that they end up seeming to be part of the individual’s salary, but an annual bonus gets noticed, especially if it’s paid out around the holidays. It is awaited with great anticipation and hopefully is big enough for the family to take notice.

Additionally, the annual bonus gets the senior team focused on the annual strategic themes, the annual budget and the long-term results of the company. It also makes the CFO’s job easier without having to worry about quarterly ups and downs leading to excessive payouts and subsequent drawbacks.

Bonuses should be earned, not expected
Don’t treat any part of an employee’s bonus as guaranteed pay. This is not an extension of their base salary.

Tie the senior executive’s bonus to the annual budget
Ultimately, the performance to budget is what truly matters and the bonus should tie payouts to both the top and bottom lines of the budget. Enclosed is a useful matrix format with one axis showing the top line (bookings is typically the best measure) and the other axis showing the bottom line which is typically earnings.

Put the whole senior team on the same compensation plan
It is important that the senior team is focused on the same goal when it comes to bonuses. While it is true that each functional executive has his or her own goals and targets, financial performance is the goal, and senior team members need to be focused on helping each other hit and exceed the budget.

Nothing is completely private
There is nothing more sensitive than salary. Take it for granted that everyone knows everything and make every effort to be consistent.