Joseph S. Tibbets, Jr. and Edmund T. Donovan
Selecting the right compensation and benefits policies is a critical challenge for all companies. But never are the challenges more difficult - or the stakes higher - than when a company first takes shape. Startup companies face an awkward tension: they desperately need topflight managers, but they lack the resources or financial stability to match what they make elsewhere.
How should young companies proceed? First, be realistic about limitations. It's impossible to duplicate the salaries and benefits offered by established competitors, and it doesn't make sense to try. Second, understand that being small brings real advantages. Without an entrenched personnel bureaucracy and long-standing compensation policies, creativity and flexibility are at a premium.
Above all, be thorough and systematic about analyzing the options. Startups should evaluate compensation and benefits choices from four different perspectives. How do they affect cash flow? What are the tax implications? What is the accounting impact? What is the competition doing?
In almost every case, equity becomes the great compensation equalizer - the bridge between an executive's market value and the company's cash constraints. Startups have to decide whether to share equity, and whether to offer restricted stock or options.
Choosing compensation policies for startups means making tough choices and setting strict limits. There is an inevitable temptation, as a company shows signs of growth and stability, to enlarge salaries and benefits. These temptations should be resisted. The wisest approach is to go slow and make enhancements incrementally.
Reprint 89111
Harvard Business Review Article. January 1989.
