One of the most niggling issues I find facing most start-ups I have consulted for is the challenge of being able to pay and maintain staff wages as a going concern. In most start-up meetings I have had the privilege of being a part of, more than half of these have stapled, in a lot of situations, mind-numbing salary caps, which in most cases leave the company almost perpetually hiking their way through every financial year or being withheld from properly scaling operations due to recurring expenses.
Truth be told, your staff, some of which may be direct partners, almost all of which are certainly indirect partners, are not just working because they enjoy your company or the business environment which they find themselves. Though in many a poll conducted over the years, wages have been found to not be top of the list of motivating factors in the workplace, it still goes without saying that staff need to be properly compensated for their efforts in helping a company grow or seeing a business idea through.
Wages, salaries, or work compensations, have been around since well before the industrial age. However, in more recent times, start-ups have found more creative ways of remunerating staff for their corporate efforts whilst still keeping the company’s financial health in green territory, and thus, on a tight budget. Particularly when you have shareholders to report to, or a potential investor who wishes to own a piece of your business, it is important to leave them with a lasting impression of a company with positive liquidity ratio to cover its going liabilities and not questionable compensation plans.
So, we shall start this article with the more commonly known methods of successfully maintaining a start-up with minimum exposure to staff salaries, and remunerations, and discuss their positives and negatives.
Work for Commission (WFC) – Used mainly in the sales unit, department or industry of most companies, big and small, WFC is an old and time-tested performance-based compensation and remuneration plan for staff. Given its formal name and made more popular in the British and American age of wholesale marketing of insurance policies, WFC is believed to have formally begun during or after the 1920 global downturn and the economic booms of the industrial age that began almost immediately after. Insurance companies were recorded to have sprung at remarkable rates and needed staff to reel in as much premium from customers as possible. As the name implies, salesmen were paid stipends to cover daily basics but were essentially offered an agreed rate for policies they were able to sell to family businesses, larger corporations and individuals alike. Some of these agreed rates were paid monthly—the more common at the time were paid quarterly, and the least common were yearly commission payments which came, sometimes, in fat lumps, much to the pleasure of the receiving sales staff.
Still a common scenario in the global insurance industry today, Nigeria not left out, WFC has expanded its reach and use to a bevy of global offline and online product and service offerings and no other entities than start–ups have taken advantage of these to their advantage.
Their benefits to a start–up are of course, WFC encourages employees to stay self-motivated, seeing that the more they can make in sales, the more generous their compensation package. It is also an excellent method of managing payroll expenses since sales must be made in order to cover associated costs.
A great pressure reliver on the corporate debit side of the accounts as they may be, WFC could sometimes have negative effects on corporate image as some overzealous sales personnel can become so focused on expectant commissions, they fail to fully explain products and service offerings to potential customers just to make a sale. Some become overly aggressive in their sales pitches and tactics which eventually have a reverse wooing effect on the potential client. WFC can also affect team dynamics as staff wishing to earn more than most may sometimes employ uncouth methods to their advantage. Some may become discouraged when their efforts reach a seeming plateau, leading to undue pressure, staff infighting and sometimes untimely resignations, none of which is good for a growing brand needing continuing sales experience on its side.
My best advice if employing a WFC practice in your start-up is to have a blend of small but periodic basic payments to help staff handle daily expenses and as many other non-monetary benefits to the job, such as late resumption or early closing hours, to help lighten the pressure of meeting salary obligations as you can afford. Making sure everyone, regardless of position, gets to enjoy the WFC package is another great way of ensuring corporate inclusion whilst maintaining high sales rates and minimum recurring costs. Plus, ensuring staff get to enjoy commissions no matter how little they reel in may help the new and introverted gain some confidence whilst on the job.
Work for Equity – More common now amongst midsized corporations and start-ups, Working for Equity means a registered corporate entity compensates employees with a pool of shares or stock options rather than cash. For start-ups, it is one of the most common ways of attracting the expertise required to scale the business while sourcing investors, or in many cases, well before fundraising rounds begin.
Start-ups use different methods in the Work for Equity scheme. Some offer Incremental Vested Equity, meaning the employee is paid the same increments of the company shares over time, starting with a base number of units and then growing by say, 0.75% or 1%, every year the employee remains with the company or certain milestones are attained, until an officially agreed number of company shares, say 10%, is reached.
The Scaling Equity is another payment option. Slightly similar to the Vested Equity option, in this case, the employee is paid a progressively larger block of shares for every year worked in the company until an officially agreed amount is reached. So, say the employee is offered 10% scaling equity of the company over a 5-year period, she may be paid 0.25%, 0.75%, 2.5%, 3%, 3.5% respectively every year until 10% is acquired.
There are also Statutory or Qualified stock options, and these are offered to highly valued staff or those who reach positions within your organization to qualify for them. Rather than cash, this gives the employee the opportunity to buy company shares at discounted price and then cash in at a higher future rate. These are however offered by much larger corporations or start-ups planning on a near-future listing.
And finally, there are Restricted Stock Options. These are offered to the employee over a vesting period or as a lumpsum stock holding at the end of an agreed vesting period. However, as the name suggests, the employee is restricted from claiming direct ownership or cashing in their shares, until an agreed future date, or attained milestone.
As can already be deduced, top of the many advantages of the Work for Equity scheme is, employees have to be with the company over a vestment period to gain full equity benefits, or thus, compensation. New global accounting standards now make it compulsory to account for this in numerical value in the company financials, however, it is still one of the cheapest ways of attracting and keeping bright minds in your enterprise while paying little or nothing in salaries.
One of its main ugly drawbacks can be, since employees are not paid monthly salaries, they may tend to take on distracting side–gigs or other businesses which may offer greater immediate compensation, thus affecting their creative input in yours. Another con is, should you eventually find investors, these may demand higher equity ownership in your company, thus eating into yours and, or, water down your vesting employee’s ownership. Sometimes leading to ugly legal situations, especially with employees.
As with the WFC, I advise paying a manageable monthly compensation alongside the Work for Equity scheme, and asides a thorough discussion with the prospective vesting equity employee on an agreeable percentage in the company and expected milestones, be sure to take into serious consideration what the new compensation plan should be, might there be a watering down effect. And have everything reflected in a signed black and white copy.
Structured or Annualized Payments – Mostly employed by consulting firms, this is a structured or lumpsum salary payment at an agreed period. So, rather than an agreed monthly salary, the employee agrees to an aggregated compensation every, say, quarter, or a super annualized payment at the end of the calendar year.
Many a company dealing with governments, large corporate organizations or international corporate bodies may not enjoy payment for their services until an agreed project timeline. These can put a discomforting strain on the financials. Thus, one easy way to compensate employees is through a structured or annualized payment scheme.
Depending on agreements with the client and thus, your staff, the major advantage of this is, you do not have to bother about paying salaries at all for a given period and work still goes on. Some stipends may however be required to keep the corporate engines churning until a huge credit alert wakes you up in the night. Conversely, its major con can also be the equal lumpsum debits you will have to make come the morning.
It is usually advisable however to have a thorough pre-engagement discussion with your staff on how you intend to compensate them for their input. I also advise taking on people knowledgeable with this structure to avoid unpleasant groanings behind your back. So, a mix of small monthly compensation, structured payments, and added commissions for achieving certain project milestones, and within an agreed window are best strategies to keep the hardest working and brightest minds on the payroll.
Staff Discounted Payments – Employed mostly by manufacturing and real estate firms, if rarely ever, this involves paying the staff with discounted products or services from your company or other businesses.
From your company, staff are offered access to company goods on credit, or greatly discounted prices, which they then resell at market value. In the case of a real estate firm, it may put a considerably reduced cap on a property, and the employee gets whatever mark–up they choose whenever sold.
For third party corporate discounts, staff are offered discount cards or given a list of partner companies they can do business with at greatly reduced prices, offering a huge savings for the employee who can choose to resell these goods at a mark–up.
For your company, this has the added advantage of employees also enjoying the benefits of distributorship, giving your goods and services a wider reach outside your traditional distributors. For third party discounts, it enmeshes your company with others, thus broadening your corporate influence within a business sphere.
Its con can be the employment of expensive tracking systems to account for which goods or services employees are entitled to as compensation and which they are not. Meaning, that such schemes can be subject to abuse and must be carefully monitored. Also, getting access to third party discounts may in the long run cost more if certain restrictions are not placed on what employees can benefit from or otherwise.
Though third-party discounts are mostly used as an added benefit along salaries payments, if adopted, it is advisable to keep the discount payments for salaries within the company and have an effective monitoring process in place to ensure you are not offering your goods at below production prices, or that employees are not reselling them at higher than recommended market value to discourage buyers from your goods and push them to rival products or services.