How to Set Up Compensation and Benefits at a Startup

Just because a small business can’t afford to offer its employees the same benefits package as a large corporation, doesn’t mean it can’t come up with creative ways to compensate when cash isn’t always available. Here are a few questions to keep in mind when designing a compensation and benefits plan for your startup.

Do you have a positive mindset?
Rather than perceiving the size of your business as a deterrent to paying your employees, try thinking of it as an advantage. Your business does not need to fit the corporate mold by offering everyone the same insurance and affordable path to retirement. Instead, you can offer a very personal, individualized experience depending on the desires and needs of your employees, which can be very attractive to people who are tired of the redundant formalities of the corporate world.

How much cash is available?
Your primary concern as a small business when compensating your employees needs to be your cash flow. You can’t afford to compensate your employees in cash until there is a reasonable amount left over after your business’ needs are met. It’s not uncommon for startup founders to work for a low salary before cash begins to free up. Don’t overspend on your employees when that same money could be used to fund a new project.

How does compensation affect your taxes?
There can be a distinct tax advantage to filing employee compensation a certain way. For example, a business whose employees would like to accept their income immediately can set aside assets as security and defer compensation liabilities while the company deducts compensation as a current expense. Otherwise, if the employees are willing to declare their income at a later date, the business can defer compensation liabilities unsecured and take a future tax deduction. Deferring to future deductions can be a valuable strategy for a startup that has little taxable profit in its first year. Before instituting a compensation program, you’ll want to consider how the information gets reported on your accounting records.

How do Similar Companies Compensate?
Even if your small business cannot afford to offer equal compensation to what large corporations offer, it’s still good to know whether certain benefits attract employees in your industry or geographical area. For example, 401(k) plans or health insurance coverage have become an essential aspect of companies in certain industries. These benefits may be expensive but you can’t afford not to offer then if that’s what employees require.

Can You Compensate with Company Stock?
Another option for a startup is to compensate employees with stock options. This is a viable option for a business whose founders are leaving jobs at other places and do not need immediate cash compensation, and it is far less risky for a startup that relies heavily on cash flow at the initial stage of doing business. Employees should be attracted by the opportunity to take an ownership stake in the company they are working for. If the opportunity for a public offering could arise and the value of the company skyrockets, they will earn much more money that you could afford to pay them as a startup. There are many ways to arrange a stock compensation plan so that you do not risk paying away too much ownership in the company. For example, a plan may offer employees stock without voting power. There may even be a clause in the compensation that allows the company to buy back shares from employees after a certain period of time.

Which Benefits Are Essential?
While your startup cannot offer all the benefits available to employees elsewhere, there are certain benefits that all companies should offer as soon as they become affordable. Group life and medical insurance are offered by most companies and can be kept to a reasonable cost by setting higher deductibles. Other benefits such as disability coverage, dental plans, child-care assistance, and retirement plans should be kept to a minimum unless there is a proven demand from employees.

Get Creative
Don’t let the inability to offer traditional methods of compensation stop you from making your office a great place to work. Office lunches, happy hours, and company outings are not too expensive and could be an effective means of promoting employee retention but also of forming a strong camaraderie, an invaluable tool for the success of a startup.