MaRS Library Rewarding your critical resources: A compensation strategy for startups
The competitive operating environment of the business world, demands that companies—including startups—recognize and compensate their most critical employees in order to succeed. Rewarding this top talent involves developing a critical resources compensation strategy.
This type of strategy typically focuses on employees with one of both of the following:
- One or more scarce skills (i.e., skills required for success that are in low supply and high demand)
- Key behavioural qualities or competencies that are critical to the company’s success (e.g., leadership, ability to influence, competitive knowledge, communication skills)
After identifying these employees and their critical attributes, it is necessary for your startup to create a compensation strategy that focuses on their retention and motivation. While this process should be an integrated talent management strategy focusing on both monetary and non-monetary initiatives, this article focuses on ways to achieve this through monetary means.
For information on an integrated retention and motivational strategy, see Employee retention strategies: Keeping top talent at your startup and Motivating employees at your startup.
Typical objectives of a critical resources compensation strategy
Typically, the objectives of a critical resources compensation strategy will focus on one or more of the following:
- Rewarding specific scarce skills
- Achieving critical project goals or meeting project deadlines. The project goals may be based on one or more of the following:
- Customer satisfaction
- Retaining employees with key attributes (i.e., if any of these employees left the startup, it would have a large negative impact)
Examples of compensation strategies
The following are examples of compensation strategies that would support the objectives listed above:
1. Premiums for scarce skills: Consider a premium that is paid in a lump sum and not added to the base salary. In cases, where the short supply of skills is expected to continue indefinitely, the premium may be added to the base salary (e.g., legacy skills that are needed by the business but are no longer offered at educational institutions)
2. Project or milestone bonuses: Consider providing project bonuses to team members for achieving specific, quantitative goals such as those to do with timing, budget, quality and customer satisfaction. Typically, these bonuses are reserved for a very select group of projects or project deadlines.
3. Retention bonuses: Consider offering retention bonuses to your top talent. This group’s eligibility needs to be carefully defined and managed to ensure retention and motivation are addressed for the right employees.
In most cases for key employees, base salary increases are targeted at a higher position than the rest of the company to ensure that their value is recognized. For example, if your startup’s compensation strategy is to pay the average of the market, you may target your top talent’s compensation toward the top quartile of the market. This can also be accomplished through a combination of base salary and bonus payments
Potential pitfalls of a critical resources compensation strategy
A critical resources strategy may create a perception that the general compensation strategy is not competitive, or an assumption that more money will successfully retain employees. Non-eligible employees may feel that they are “second-class citizens.” And your startup risks that the eligibility test will weaken in the future. Being aware of these risks may help offset them.
Use your critical resources strategy as needed
For companies that operate in a highly competitive environment, a critical resources strategy can be a program that is turned on and off when required. Preparing for situations that require this strategy can save you time and keep you ahead in the competitive race.