Salary increases in startups [closed]

Question

I'm the owner of a very small startup in the IT sector of Germany. Very small means 3 people getting a salary: 2 of them are founders (including me), and 1 employee.

The employee is still very young (in his early 20s), and hardworking. This is true for the office time between 9am and 6pm, he doesn't work in the evening or on weekends, but my co-founder and I are fine with that. He gets a salary that from our point of view is high for such a small startup, especially when taking his age into account. Before us, he has worked for a few years for a large company (think of the typical large company: Much bureaucracy, less interesting work, … typical 9 to 5 work).

Now he has finished his first year, and I am very confident with his work. Hence, of course, I want him to stay. However, he has asked for an increase in salary, because "this is what he knows from his previous company", and he says that he thinks he deserves it.

On the one hand, I understand that he feels this way, and that this is what he is used to.

On the other hand, I don't want to raise a salary, just because 12 months have passed, since then we will have the same thing again in another 12 months. I would rather couple an increase in salary to another factor, such as achieving outstanding results. Mind you, his work is really well, but doing his work is actually what he is already paid for with a salary.

Apart from that, it would be difficult to pay even more, because we are such a small company.

So, to cut a long story short: On the one hand, I don't want to give him a raise in his salary, just because 12 months have passed. On the other hand, I don't want to simply say "no", because this might make him feel bad, and he has done really good work.

I could imagine saying something like "not now", and then working out a plan with him how to achieve this salary increase. What do you think of this? Is this a good / bad idea? What other options are there? What could / should I do?

Answer 1

Keep in mind if you don't offer at least a 2% raise, you're actually paying him less due to inflation. Are they doing less valuable work now than they were 12 months ago?

Plus, a programmer early in their career quickly becomes more valuable, so their worth increases more quickly.

Don't think about this in a moral sense (i.e., does this person "deserve" more?). If you don't pay someone in a manner that keeps up with the market rate, they're going to go somewhere else. You're going to have to spend resources finding a new person, and months bringing them up to speed. If you're okay with that risk, go ahead and lowball him. If not, give him a raise.

Be careful, though. Failing to give him a raise might crush his motivation to do any good work for you.

If this person really did do great work and you don't give them a raise, what incentive will they have to do great work again? You send the strong signal that "good work will not be rewarded here," not necessarily your intended signal of "you need to do more." Personally, if I were in your employee's shoes, I'd either coast for a year or two, or start hunting for a new job. If they start doing that, how much will that cost you?

Answer 2

On the one hand, I don't want to give him a raise in his salary, just because 12 months have passed. On the other hand, I don't want to simply say "no", because this might make him feel bad, and he has done really good work.

From your employee's point of view I doubt he is viewing this request for a raise as being simply "because 12 months have passed" but rather that he has been doing as you put it "really good work" for the last 12 months and in many places convention dictates that annually is when performance can be taken into account and salaries potentially increased.

I do however understand what you are saying about being a startup and budgets being tight, however I think you may want to consider doing something to recognise your employee's efforts over the last year or you risk demotivating him or even losing him.

If budget is too tight to commit to a salary increase there are some other options you can look at:

• One-off bonus - makes it clear that you appreciate the efforts he's put in over the last year but doesn't commit you to any ongoing cost or commitments

• Equity - a pretty common route for startups to take, it can work as an incentive to continue to work hard in the future and only costs you anything if the company does well enough.

• Additional vacation time - while it costs you in terms of lost productivity it doesn't mean a direct cash outlay and depending on your employee's circumstances it may be quite valuable to him

  I think regardless of what option you choose to take (one of the above, something else, or nothing at all) I think you need to have a conversation with your employee in order to make sure you are both on the same page regarding expectations as to when and how raises can happen - if he's used to the annual review and increase model (which is not uncommon) and you don't plan to operate that way then making sure everyone understands that is going to save you strife in the future.

Answer 3

Give them a raise.

They have become better at their job over those 12 months. Not everyone will have achievements they can list due to the nature of their work, but ultimately, they have become more valuable to your firm by absorbing more information and obtaining new skills, improving existing skills.

If you decide not to give them a raise, remember that they have also become more valuable to other firms as well. If you aren't paying market rates for your employees' time, don't expect them to stay, especially in software where we get calls from recruiters quite often.

Answer 4

The classical answer to "how to avoid paying programmers?" is simple,

you offer them all the usual idiocy:

• Free! Snacks!

• one day you might get rich. Did you hear about the janitor at Google? He has 72 million dollars now! that could be you! stick with us!

• we'll buy you a new laptop! You can even use it at home!

• come on, we'll take you to lunch at the third best place in town! You deserve it!

• organize your own time! come flexibly! work at home!

• you can wear jeans! or even bring in your cat!

• we'll give you Health Care Plan, and Insurance!

• we gave you your break, how can you give up on us now?

• emotional nonsense: "Surely you will be loyal to us?"

Just the usual comic shit. That's the answer to your question.

In the past - you could say in stage one of the business - this worked.

That was precisely how the business operated.

IMO however, there has been a sea-change. It's becoming harder and harder to use these tricks.

So - all the way through that era, everyone quietly said (when no programmers were around), "Imagine if these kids ever realize they can get paid money? We'll all be fucked."

In fact - that has happened. You basically have to pay through the nose (ie, actual money) for competent programmers now.

So the answer to OP's question is they COULD try the usual tricks (listed above), but it's entirely likely they are screwed and will just have to pay.

(Just as with musicians, experience is the key - it's still very hard / impossible to get your "first jobs" as a programmer.)

Answer 5

I could imagine saying something like "not now", and then working out a plan with him how to achieve this salary increase.

You should have done that 12 months ago. You are right, a year is no magic number, but many people in the workplace treat it as a cornerstone. Finances and taxes work on a yearly basis.

Startup, small company, whatever, either you have the money or you don't. If his work is not ultimately creating the funds to increase his pay, there is no money to pay him more. If there is more money, but you feel his current salary reflects his level of input, he doesn't deserve a raise.

Businesses that cannot afford the market rate for a given position, may be suffering from a flawed business model. As a co-founder, you need to sell the idea that it is in this employees best interest to defer compensation for potentially larger gains in the future. What you are doing is rewarding him for sharing the risk.

Risk sharing is not for everyone. Usually, younger employees can afford it because they don't have those big life expenses like family, failed health, retirement, etc. The real question is, can you create a plan that is equitable in his eyes along with you being someone he can trust. This really depends on what you may have promised or implied 12 months ago. He may interpret "we'll see if we can give you an increase" with a lot more optimism than you do.

My suggestion is to see if you can work out something other than a salary increase. Have a bonus plan, stock options etc. Maybe he needs to put in more hours or have some flexibility and work over-time when needed? Is it possible, he'd like to come in later or work from home a few days a week.

This seems difficult to nearly impossible to compensate/motivate people to do the things to make the business successful, but that is your job as an owner. Many businesses fail because of an inability to do this. Nothing else is more important when managing people.

Answer 6

On the one hand, I don't want to give him a raise in his salary, just because 12 months have passed. On the other hand, I don't want to simply say "no", because this might make him feel bad, and he has done really good work.

I could imagine saying something like "not now", and then working out a plan with him how to achieve this salary increase. What do you think of this? Is this a good / bad idea? What other options are there? What could / should I do?

IMHO, being ready and able to give annual raises to those who deserve them is just the cost of running a business.

If you don't want to give raises even though warranted, then your alternative is to continually hire replacements for workers who will inevitably leave after a year or two.

My suggestion would be to give this good, trained worker a raise. You can base the size of the raise to match what the market will bear. Or you can offer less along with some equity in the startup.

If you choose to give no raise at all, or a below-market raise, then start getting prepared to hire and train a replacement.

Answer 7

The employee is worth more just because he has worked for you for 12 months.

He now has 12 more months of programming experience than when he started. He has solved new problems he hasn't before, found more efficient ways of solving old ones, and has otherwise increased his productivity.

More importantly to you, he has acquired 12 months of knowledge about your business and about the problem domain that he has worked in. He understands requests more easily and with less explanation; he'll make fewer mistakes because of that. He has more insight to make suggestions and appropriate technology choices. He knows more about the norms and assumptions and expectations of your clients/customers. He can respond more quickly to sudden failures (server goes down, critical bug discovered, etc.).

This is all valuable knowledge that is making or saving you time and money and reducing your risks. Sure, these are all intangibles, but that doesn't mean they're not valuable. Decide how much all that is worth to you and give him a raise based on it.

Also important to consider is that you have a bus factor of one here. Losing all this knowledge and having a new employee re-aquire it will be a significant cost to you. You're not likely to save resources by losing him.

12 months as the time frame is incidental. It's just a cultural norm.

Answer 8

2 of them are founders (including me), and 1 employee.

Sweet and short: if that employee quits, your company is done for.

Pay him what he wishes, if it is reasonable, and if you can, add a bit more. If you really must avoid increasing his salary (which will have a cumulative effect) give him a significant bonus payment (which can be significantly higher than a raise would be because it is not cumulative).

If you actually have no spare money to pay more, then you are about bankrupt anyway, aren't you?

Answer 9

Everyone else has covered the "you need to pay to keep staff", which of course is correct.

However, if you truly cannot pay this person more money, then the problem is that your startup's revenue is not growing. You presumably wish to solve this.

Why not tie some of his salary to the increase in revenue? Now you have incentivized an employee to actually make money, which is leagues better than incentivizing them to "write cleaner code".

If nothing else, this allows the employee to understand what the company is doing, and why they cannot earn more money right now.

Otherwise, keep an eye out for someone writing here about how "i work at a startup and haven't had a raise in a year, can i leave even though they depend on me?" questions here, it will probably be your man.

Answer 10

Taking a slightly different angle, ask yourself what it'll cost you if the employee leaves? Many large companies have redundancy and can weather the opportunity costs of slowing down productivity while someone new comes up to speed.

Startups of 5 people probably don't have that luxury, especially regarding programmers who, more than likely, have been building critical systems with no oversight or documentation. If you're in that position, losing him can mean months of technical stand-still while you figure out what he did.

Thus, if you find that you are in this position, I'd suggest figuring out what other companies might pay him and add 5-10% so even if he decides to leave, he'll have to take a pay cut to do so. I'd also encourage the building of some redundancy so that you can weather the loss of an employee.

I should note that as a software engineer myself, I am slightly biased in my opinions on the matter, but I still feel like the justifications for this approach are sufficient to consider it.

Answer 11

I sympathise with you.

You're the founder of a small startup. You, along with your cofounder, have seen your time and money disappear into the 'keep the business running' black hole.

You're working all the time - evenings, weekends, public holidays. If something goes wrong, you're the one who gets to work on it.

It's highly likely that, after factoring in the time you're spending, your hourly rate is fairly low.

You've employed someone who does good work - within work hours. If something goes wrong, they can just walk out. Not their monkey, not their problem.

You're reluctant to put their pay up because their compensation:input ratio will be out of kilter with yours.

Here's a few suggestions I have for you:

• In the early stages of a startup, you need people who will be all-in with you (read Shoe Dog by Phil Knight, the founder of Nike, for an example of a team who were fully committed together). You can either get highly motivated people, or else align everyone with a common goal. You can do this by either giving the employee equity, or a profit share (read The Great Game of Business by Jack Stack). If the employee gets 2% of net profit for the year, they'll do everything they can to increase net profit. Read The Great Game of Business by Jack Stack for an example of a profit-sharing programme.
• For the above to happen, your compensation needs to be fair. Contrary to what people in the comments have said, if you're working in a business, you should be fairly rewarded by getting either wages or a salary at market rate. Take a note of the time you put in for two weeks, and generalise this over a year. Calculate your hourly pay from this - are you getting paid fairly? If you're getting underpaid, the net profit figure will be falsely high.
• Err on the side of paying him more. If you're happy he's the right person for the role, you want to keep him - but it will be difficult. Have a talk with him about the financial situation of the business, expected growth, his future at the company, why you're finding it difficult to pay him more, and what can be done about it.

As a final note - consider what's worth more: the equivalent value of a payrise, or the time you'd spend hiring and training a new person.

Good luck!

Answer 12

I think that there should be an annual review, and in all fairness you might say he was just doing his job well, but consider the next person in his shoes isn't going to do it as well.

At the moment he may be satisfied with a smaller raised if he likes the job here, if he resents the job it may not be enough money to get him to stay.

When employees here there will be no raise, or pay increase structure they simply become demotivated. Now you may feel time itself isn't much of a cornerstone, perhaps launching product, reaching x signups is better measuring sticks, but these should only be used if this employee is in direct control over that, like is he marketing? Is he in sales? Getting a bonus tied to someone else's job might not motivate him neither.

If his job is to crush bugs and crush them well, you need to evaluate his work, and reward it properly. He knows your system, he may find and fix bugs faster than he would have 6 months ago, meaning more time to fix more bugs.

Answer 13

This is a common problem in small companies, startups, and even most mid sized companies. You need to build your company in a manner where if somebody leaves, they don't take the company down with them, especially since he isn't a stakeholder (why not?).

This means you and your partner understanding what the dev does well enough to explain it to the next guy. Also, consider that giving him a 2% raise may not be enough to keep him, you're a start up, why would somebody pick you over an established employer (you'd need to figure this out too to hire a replacement, but separate issue).

My advice would be to give the raise and work on taking hold of the reins, or give the reins to him with a company share.

Answer 14

I will add one more answer to this question to emphasize several things that seem to be being overlooked.

1. In Central Europe in IT it is expected that you join on a lower salary and undergo a trial period. In IT this can easily be 12 month, especially for a junior. To then expect a rise is normal.

2. There is no logical implication that this would imply an annual rise.

3. Since the financial crisis CPI inflation rarely has any effect on salary. The contrary.

4. Since the crisis, the biggest effect on salaried employee living costs is consumer debt interest rates which have dropped annually.

5. CPI inflation is much lower than asset price inflation.

In summary: Initial pay rise is due. Non following.