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Executive Compensation

5 Dos & Don’ts of Startup Executive Compensation

Alex Grammatic
Alex Grammatic / 2 Min Read

Creating an effective executive compensation package can prove difficult even for established companies. Startups, on the other hand, may encounter considerably more confusion in determining how they should compensate their most important team members. After all, startup business leaders may not have years of experience running a company, or access to important data like overall business revenue or the economic impact of an executive. Given all that, today we’ll share five dos and don’ts of startup executive compensation. Check them out here: 

#1 Do Your Homework

In order to form a working executive compensation package, it’s key for business leaders to determine their available money in the bank, the company’s current valuation, what a “competitive” compensation package looks like for executives in their field, and how valuable a given executive is to their organization. By conducting a competitor analysis and juxtaposing competitor executive salaries, business leaders can arrive at a ballpark figure in regard to base salary. To figure out how valuable an executive is to the company, you can also use our executive compensation calculator here as well for further reference. This process can be more complex if the business has only just formed. If you have any data available on that subject, then you should use it accordingly.

Use caution and don’t jump right into an insurance application when it comes from a jack-of-all-trades advisor/financial planner.

#2 Don’t Overextend Your Capital Resources

Naturally, no new business wants to lose the services of a talented executive. Yet, some companies hamstring their own chances of growth by paying a higher salary to executives than they can reasonably afford. Most small businesses only have so much capital available for staffing, outsourcing, and other crucial investments. So draining most of your startup capital on an executive salary could prove counterproductive.

#3 Do Get Creative

Salary is just one aspect of executive compensation. Indeed, businesses can compensate executives in other ways, including:

  • Short-term incentives (I.E. bonuses).
  • Long-term incentives.
  • Retirement packages. 
  • Stock options. 
  • Insurance coverage. 
  • Miscellaneous perks. 

As we’ve mentioned above, a new business with a finite amount of available capital may be better off including more long-term incentives and stock options in their executive compensation packages. This makes sense in particular if the executive in question is also a founder or owner of the business.

#4 Don’t Alienate Top Talent

Key players are vital to their short-term survival as well as the long-term success of their company. What’s more, replacing high-ranking leaders who possess specialized knowledge and/or numerous industry contacts could end up costing a company a significant amount. (And that’s not even factoring in the expenses associated with training and onboarding a new team leader.) While businesses need to make sound financial decisions in terms of compensation, they must also ensure they don’t lose their most talented team members due to insufficient pay or benefits. Striking the right balance in this matter is essential.

#5 Do Find a Partner

It’s no overstatement to suggest that crafting the right executive compensation package could mean the difference between success or failure for a startup. Thankfully, businesses can partner with organizations like Blue Herring for assistance. At Blue Herring, our expert team will work closely with your staff to uncover unique compensation solutions that fit within your long-term business continuity strategy. Plus, we’ll pore over key data and analytics metrics and collaborate with other industry professionals to oversee legal arrangements when necessary. When you partner with us, we’ll handle the heavy lifting of executive compensation so you can focus on building your new company from the ground up. Contact us here to learn more!

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

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