"But if you offer too much compensation, management and employees may begin to feel fat and happy and lose the motivation to maximize long-term value for shareholders."
IMO (and while I can't speak to the management side of it), this displays a horrifying misunderstanding of the mindset of the technical people you want to hire and pay well.
As an experienced and driven programmer, you hire me and pay me well so that my only concern regarding work is how awesome I can make the product I am working on. My name is attached to that code and that product, I need it to be as good as I can make it within the other constraints you've placed upon me. You can only fuck this up by paying me too little (because then I start to wonder how I am valued and whether or not I am wasting my time with a company that doesn't value me enough), not by paying me too much.
Granted, not every programmer is like this, but the ones you want to hire are.
Absolutely agreed, and I've been on both sides of the table. I even had another manager argue with me that we should push extra hard on offering the lowest possible compensation we could get away with, so that we could be sure of only hiring people who were "really desperate to work for our company". Sigh.
I have read about cats that if you need a mouser you should not worry about feeding it too much. Cats will catch mice even if well fed. Feeding it too little means it will start to scout for food far away from your place, thus catching mice elsewhere.
Domestic cats are somewhat unique in that they don't exhibit contra-freeloading. That is they prefer not to work to working. I guess they consider catching mice "play". :-)
Completely true. Our girl cat was a killing machine. Multiple gophers each weekend -- always presented them as presents. But she loves to eat and takes advantage of the fact the other cat doesn't eat as much. She's a pudgeball now and hasn't caught much in awhile (some of that is due to age...).
worrying about money means less time working. Less time thinking about how to engineer things nicely / solve high value problems. If you want great work from good people, compensate them well so they can FOCUS on what you've hired them to do.
And that brings us back to the critical point: Of the people who are smart and have 12+ years experience, a significant portion will (A) be wise as to the going rate for good people, and (B) have families so that a below market salary has a clear negative impact on their daily lives.
Is it really worthwhile to choose to avoid hiring ~50% of the best people in the industry at the outset, on a vague fear that personal happiness will doom the startup? Is that a winning recruitment strategy?
Anyone that is working for a startup should be invested in getting the best value out of the shareholders. This is usually the case because they themselves own a stake in the company in some form or another.
You should be paying your staff what they're worth and not short sell them because you're worried about them feeling "fat and happy." That's simply ridiculous.
If they themselves are not a shareholder then they should be working towards something. Is that a raise? Maybe that is equity? Whatever the incentive you can't just hire people and expect that they're going to live at the office without adequate compensation.
I believe there is a dominant meme in business techniques that drives startup bosses to adopt a slavedriver's attitude. I mean, look at the words themselves: "happy" is used in a negative sense.
The salaries he listed were for executives, not coders.
If you pay your CEO too much more than $260k, there might be a risk that he/she start worrying about keeping the job (and the high salary) more than growing the company.
There is no really sense in your second sentence. The only way for a CEO to keep his job with VC partners, is to increase the income of his partners so he must increase the revenue of the company. It is the first goal of any CEO (even for non-profit company). If he don't, partners will kick him of his seat to put someone who cares about their investment and do his job.
> If you offer too little compensation, you may not attract the talent that you need to be successful. But if you offer too much compensation, management and employees may begin to feel fat and happy and lose the motivation to maximize long-term value for shareholders.
> Salary is a measure of how much value one is adding to a company, and that information should not be a secret.
> If companies are consistently paying management teams 30% away from these averages in either direction, there is likely a problem at the company.
This runs the gamut from superstition (paying people more may make them less 'hungry') to untrue as a matter of fact (salary is an equilibrium of supply and demand, not a measure of value added), to playing to the middle ground fallacy (you should pay upper management within this range dictated by an average).
My statement that paying people excessively can make them less hungry is something that has been observed through experience. I'm not saying that this is always the case, just that it happens and is something to be aware of.
Sure, salary is a matter of supply and demand- which is why I'm advocating for more transparency so that all market participants can make decisions with more complete information of the market. But I'm saying that supply and demand SHOULD be dictated by value added.
I'm not necessarily saying that every company should pay within this range. Just that this is something to be aware of, and if there is significant deviation from these numbers, more thought should be put into the decision making process.
I agree with your central point, by the way. Salary transparency is a great thing. But some things are cliche, and I think the 'hungry' thing is one of them. "We shouldn't pay too much so people stay hungry" is something you'll, e.g., never hear Wall Street folks say about their own companies.
Do you advocate reducing your own income? If it is better for others to be hungry then surely it is also better for you to be hungry. And yet I doubt that you argue with your boss to be paid less.
I am not sure why your employees would be less 'hungry' if you're paying them more unless they feel like they don't have ownership in the product. Or maybe they just didn't jive well with the team.
Either way they are staffing problems - hire the right people and pay them what they are worth.
I spent years as an executive compensation consultant both creating and analyzing salary surveys for the world's largest companies.
What it teaches you is that:
1. Never use averages, always use medians
2. Sample sizes are critical, and anything below 5 samples you just can't trust (ideally 30, as the Central Limit Theorem suggests)
3. Garbage in, garbage out: if you don't know the population of the sample, then you can't trust the output (i.e., how many employees, what's the revenue run rate, what's the user growth look like, what's the valuation and how many funding rounds, etc).
I love the spirit of this data, but based on the core principles outlined above, you can't hang your hat on this data.
In software engineering land, not knowing these three principles is like not knowing the principles of MVC.
great feedback, thanks. admittedly, my data alone does not do much. Just wanted to spark some discussion on the topic, and I thought I should eat my own dog food.
Totally understand, apologies if my comment came across as harsh, just trying to make sure we look at compensation data correctly since some of those numbers look a bit high relative to what I would imagine the market 50th percentile being for newer startups.
"But if you offer too much compensation, management and employees may begin to feel fat and happy and lose the motivation to maximize long-term value for shareholders."
God forbid if your employees are happy.
In all seriousness, I don't even remotely understand this mindset. Why would paying your employees less than they deserve or less than is optimal encourage them to "stay hungry." If anything, this is going to deter them from working inordinately hard or may drive them from the company altogether. If a company pays well, the employees have more to lose and are likely have a greater appreciation for their employer.
I just can't fathom how they expect that, by paying less than they ought to or less than their employees deserve, the employees will be more inclined to work hard.
This speaks to a fundament misinterpretation of employee motivation and is incredibly disquieting.
I think the keyword "optimal" in your 4th sentence is what he meant.
There is an old saying that "You should pay employees enough so that they don't have to worry about making more money, but not enough so that they won't have to continue working."
*edit: One thing to keep in mind is that everyone is not out to do the best job they can, and it is difficult to determine this until after you have worked with them for a while.
Paying management less than they deserve would not encourage them to stay hungry. But paying them more than they deserve based on market dynamics could possibly cause them to lose motivation. This is definitely not a rule that occurs 100% of the time, but my point is its something to be aware of, and salaries need to be more transparent so better-educated salary decisions can be made (for all participants of the tech ecosystem).
I doubt he has anecdotal evidence or he'd have mentioned specific cases in his article. It's a theory he's working on as part of his efforts to convince the best and the brightest to work for his company, a high risk unstable start up, for below market rates. There's one of these articles out from some guy at a VC backed firm who is unable to afford competent people every few weeks. The best idea these guys ever have is to write articles telling all the "coders" that they are not as special as they think they are and would be lucky to work for a fine firm such as theirs in return for vague promises of magic beans.
Meanwhile I have no problem at all hiring the best and the brightest. It's super easy to find good people and hire them and how to do so is not a secret at all.
Nope. Not sure how one might prove something like that. I'm citing it based on experience. Again, not saying that this is always the case, just that it is a counter intuitive phenomenon to be aware of.
Why the down votes folks? Counter his experiences with your own examples or theory, tell him you disagree with what he thinks he saw (even though you weren't there) but sheesh, its not like he said something worth down voting. (I'm going to feel silly if the down voted post was full of racial slurs and has been edited since the down votes to remove them.)
Nick, since you're advocating transparency, I'd be curious to know the salaries paid by venture capital companies, such as North Atlantic Capital. For instance, what does an associate, managing director, or marketing director make?
All of the offers I get from VC backed startups are always ridiculous. They seem to believe that I have to take an economic cut just to help them make it. These days, I talk about compensation first, and then about the project itself. No need to waste a week talking and getting to know the team if they can't pay me a reasonable amount.
After a couple of similar experiences, I too started to mention compensation up front. While it has saved a lot of time, I'm starting to have second thoughts about this approach. The problem is that you don't get a chance to sell yourself to demonstrate why a higher salary might be warranted.
I tested that, too. But I always ended up wasting too much time. I have a base salary of n. If their initial estimate is under that, then I move on. I only talk to those who can at least pay n. Otherwise, its a waste of time. I adopted this system after I wasted a couple of days interviewing with a technical advisor (this title is now a red flag for me).
Currently doing Coursera's Dan Ariely's behavioural economics course... A couple of thoughts:
- You want the relationship with your employees not to be based solely on money. If the only reason they work for you is the salary then you have a problem already.
- It has been shown experimentally that larger incentives can negatively impact performance. This is more important for bonuses but salary probably shows some similar behaviour. In general when you worry about the money and the stakes you become less effective.
- What people are paid relative to their peers is important. People feel better when they're paid better relative to their peers. The actual amount is less important. This supports the "pay fairly" approach.
EDIT: An interesting observation that has been made is that requiring public companies to publish their CEOs salaries has not caused those salaries to decline. If anything it caused them to keep going up. A similar effect should be expected in VC backed companies if they publish similar data as prospective CEOs would always want to be paid better than said data.
A couple of decades ago I read about a company in New Hampshire of Vermont that made skiing and hiking outerwear, definitely not hi-tech. They posted everyone's salaries on the wall, including management. If someone wanted a raise he crossed out his old salary and wrote in a new one. The president(?) said no-one abused the system because it was self-limiting it was all there for everyone to read.
I've never seen it anywhere else. It would take real guts to do it in Silicon Valley.
I thought the same thing (with a gasp as a CTO myself :))
But I'm going to assume this article references companies where the Technology department is more of a cost center than primary operations.
For example a SaaS company that basically just has sales/marketing and technology/operations, the CTO is also acting as the COO, so I think you could attribute the COO salary to that of the CTO in a SaaS or high-tech startup.
That VP of Sales number looks low. The article does say "salary," so it may technically be correct, but I'm sure total cash comp (not including options) is higher.
Yeah, at many B2B product or marketing companies, I assume the sales folks are heavily compensated based on commission while the CEO and founders are getting more equity (but possibly lower pay than a lot of the sales people).
Definitely true for sales folks at B2B companies- total comp can sometimes eclipse CEO when adding commission. My piece is focused on salary, not commission, cash bonus, and equity. Surely, a more complete picture of total comp is more valuable, but the scope of the piece was just focused on salary.
Then I think the article should explicitly point out that salary is only a piece (and perhaps not the largest piece) of total cash comp. Otherwise it is very misleading to the naive reader.
No solution was offered here. This generic advice could be applied to anything: "in order to solve XYZ, ask some of your peers and perhaps try some products whose stated purpose is to solve XYZ".
im not smart enough to come up with a solution, that's what the HN community is for. The purpose of the piece was to shine light on a problem (lack of transparency in salaries at VC backed companies)
On that note, I'll throw out an idea - maybe the valuation of company stock is not accurate enough. If it were, the problem would be much easier:
big co salary = startup salary + #shares * (stock price - option strike price).
EDIT: diving one level deeper, perhaps a company needs two valuations: one for investors buying the stock (market driven), and an internal one that employees are likely to accept. The two numbers should be the same, but during bubbles there might need to be a gap between them.
But if you offer too much compensation, management and employees may begin to feel fat and happy and lose the motivation to maximize long-term value for shareholders.
-may hold for upper level management, but VERY unlikely this holds for rank and file employees.
If we're going to have this discussion and focus on the management team, then I think we need to say how much money the company has raised. My thinking about salary for myself and co-founder is definitely funding specific.
Why? If I got 50 million dollars in funding or 400k, I'd still probably pay myself only what I need to survive/present myself and pour as much into the business as possible, at least until profitability and even then my salary would remain low until profitability was maintained and began to increase rather than be an issue.
Exactly. There's a time element to this. It takes 7-11 years for a startup to go public. Your life changes during that time and so does the relative impact of your salary on runway.
7-11 years for a startup to go public, but how long to reach profitability to the point where an increase in salary won't affect that profitability? If it takes 7-11 years for that, you're probably not in the right business.
It's not about the amount you raise, it's about what stage your company is in. That's my real point there.
Is salary transparency definitely a great thing for companies? I've been told that in law firms (where all non-partner position salaries are revealed) this causes a race to the bottom and is not good for employees.
It doesn't really create a race to the bottom. What it does do is basically let the most profitable firms set the salary scale. When they raise salaries, everyone matches for fear of being seen as a cut below. Nobody cuts salaries because doing so is very conspicuous in a market where most firms pay the exact same salary. So I think in that sense, transparency has the effect of pulling up the median salary and is good for employees, though not necessarily employers. On the other hand, it takes pressure off the top firms. The most profitable firms don't raise salaries unless they really have to, because they know that if they do it'll move the whole market upward and any recruiting advantage will be short-lived. So in that sense it's probably a bit worse for people at the top who might make more otherwise.
I think using salaries as incentive systems is mostly hokum except for situations where performance can be very easily quantified (e.g. sales people). I think transparency combined with lockstep (pay is strictly by seniority) is a great model, at least for organizations where everyone is mostly doing the same kind of job.
If you offer too little compensation, you may not attract the talent that you need to be successful.
It depends on their circumstances. There are smart people who'll work for low salaries if there are genuine reasons to do so, but not many of them. Most of us can't afford to work for free anymore.
But if you offer too much compensation, management and employees may begin to feel fat and happy and lose the motivation to maximize long-term value for shareholders.
Ahem. :cough: BULLSHIT.
That said, most startup executives I've known were worth nothing near $175,000 base. Most of them could justify $175,000/year not to work anywhere in technology again. Then again, I've never worked for a good startup.
Alright... now, this is a fun topic. I worked for a startup with outright evil management where there were 5:1 salary disparities over the same job. One person was making $30,000 per year (in NYC) in a non-tech role, then busted his ass to move over to engineering and did so, but was told that the promotion to engineer "should be enough". People were being hired into the same role at 4-5 times his pay. He eventually negotiated more, but he was underpaid for years. That was the startup that inspired my most famous blog post.
The good news is that most startups pay market. Salary may be about 15% less than you'd get in another company, but equity (at valuation) fills the gap. The bad news is that most startups are awful places to work and you learn very little and so you tend to "job hop"; it may not even be your choice because "fail fast" is often used as an excuse for impulsive firing. After a while in that game, you have more jobs than years in your history and startups are the only market left for you.
Your points are tangentially related to a question I've floated around in my head for years: when is a startup not a startup?
There's the income/profit metric (if a company is paying its CEO $200k+ and has several $150k+ engineers, they're obviously selling a significant amount of something)
Or there's the acquisition metric (our goal is to be bought, and we haven't been bought, so we're a startup)
When a tech startup runs well, it's constrained open allocation. People can't just go off and "do whatever" but if the work is important to the business, anyone gets to step up and do it. There's no fighting over "headcount" or jockeying for plum projects. There is the work that needs to be done and as long as (a) people work on things that are relevant to the business, (b) people take enough of an ownership mentality to do the difficult or unpleasant stuff that's comes along with the good, they remain in good standing.
Once you have closed allocation, you're definitely not a startup.
IMO (and while I can't speak to the management side of it), this displays a horrifying misunderstanding of the mindset of the technical people you want to hire and pay well.
As an experienced and driven programmer, you hire me and pay me well so that my only concern regarding work is how awesome I can make the product I am working on. My name is attached to that code and that product, I need it to be as good as I can make it within the other constraints you've placed upon me. You can only fuck this up by paying me too little (because then I start to wonder how I am valued and whether or not I am wasting my time with a company that doesn't value me enough), not by paying me too much.
Granted, not every programmer is like this, but the ones you want to hire are.