Welcome to the beginning of the year. It’s a beautiful time when the snow is falling, new year’s resolutions are not yet broken dreams, and employees suddenly demand a steep salary increase in your chronically underfinanced start-up. You check your bank account with the usual anxiety and realize that this whole salary-increasing-thing would be a wonderful activity…in the very distant future. But you need that dear employee, and they surely know that. Neither messing with your staff’s motivation nor breaking the bank sound like the confetti party you hoped to start the new sun rotation with. So, happy new year — sometimes being a start-up CEO sucks.
I recently coached a founder who stumbled into such a catch-22 for the first time. Having been through the fireworks many times myself, here are some principles that I would recommend to cure this new years’ hangover of a situation.
Don’t respond right away
Salary discussions might be highly emotional for the employee and you as a manager. Resist the urge to respond right away and listen carefully to the employee’s position. Never say ‘yes,’ ‘no,’ or anything that might be understood as a decision. It’s reasonable to take one or two weeks to respond.
Take some calm time in a rational mindset and think about the employee’s journey in your company so far. How have they evolved since you hired them? How did their salary change over time? Did they take on new responsibilities along the way? How do you rate their performance? How does their salary compare to similar positions in comparable companies? The goal is to get an objective sense of a fair salary. If possible, ask others for input and benchmarks. Also, think about biases: Studies have shown that on average, men ask more aggressively for higher wages than women.
Focus the discussion on the contribution and not the personal situation
Employees often state their individual circumstances as a reason for the desired salary increase. “I just moved to a bigger house,” or “I have to pay off my student loans” might understandably be on the top of the mind for your employee. I’ve heard all kinds of stories like that. “My wife demands a better lifestyle” was one of my favorites. Don’t fall into the trap of exchanging arguments about any issues like that. It leads to nowhere. Focus the discussion on the employee’s contribution to your company and not their individual circumstances.
Turn the discussion around. What can they bring to the table?
You might instinctively try to avoid any salary increases altogether because you know that you are low on cash. By doing that, you might lose out on a great opportunity. Remember that you want ambitious employees, and asking for more is a sign of higher aspirations. Earlier in my career, if a sales rep would have asked me for a salary of a million dollars, I would have told him that he’s insane. Today I would ask him how fast he can bring in twenty million in sales and gladly pay him his million if he delivers. So ask yourself: What would the employee need to contribute to justify the desired salary. This can lead to a very fruitful discussion. Present them a tangible list and tell them how you’re going to support them on the journey. Now see what happens when the ball is in their corner again. Do they pick it up and work on the list (a good sign)? Or do they dismiss it and only talk about their past achievements or personal situation (a less than good sign)?
Think of creative ways to ‘pay’ them aside from cash
They’re asking for a higher salary, but maybe there’s a better way to compensate them if you want to keep them. How about having them take on a special project within the organization? How about sending them to a conference or covering tuition for a course that improves their skills? How about a new title or a small leadership role like training new employees? How about a bonus payment tied to their performance, a sales goal, or a shared company objective? Why not think about handing out (virtual) shares in the company as a long-term incentive that doesn’t cost you any cash and might be even more motivating? We always made sure to have a colorful bouquet of possible courtesies ready to be flexible.
What message does your move send to the rest of the team?
You might have non-disclosure agreements, but please be sure that your employees talk about their salaries with each other. It is crucial to remember that by satisfying one employee with an individual arrangement, you might screw up the compensation structure for the rest of the staff. Perceived unfairness can be extremely unmotivating. When I made a salary decision with an individual employee, I always imagined that it would be entirely transparent for the rest of the team. We never actually disclosed salaries, but the mental exercise helped a lot. When you realize that an exclusive concession might disturb the fragile balance of the compensation structure don’t do it. To favor an individual over the rest of the group might be culturally toxic.
Don’t be stubborn
Sometimes we would get stuck on salary discussions about an amount like two hundred dollars per month. It’s not worth to fight for every penny here. Needing to replace the employee or having them stick around unmotivated is much more expensive.
Establish a yearly routine and avoid ‘on-demand’ discussions
The year is long, and employees will move to bigger houses, book expensive vacations, get more qualified or get a crazy-high, unsolicited offer from some other company triggering the need for yet another ‘on-demand’ discussion about compensation. Avoid those and instead create a rhythm as early as possible. Your life will be so much easier if you handle those kinds of talks once a year instead of uncontrollably drifting from one ‘special rule’ to the next. My friend, who employs well over 1.000 people, does precisely that. There is one salary review per year for everyone. Even if someone gets promoted within the year, their salary doesn’t change until the next review. There is a lot of beauty in simplicity.