Employee Incentives Don’t Need to Include Company Equity

In a recent column, you responded to an entrepreneur who wanted to pay a “living wage”, which is much higher than the minimum wage. For those startup companies with limited revenues who can’t afford higher wages, could giving staff some small equity stake in the company be a consideration?

Perhaps. But I’d advise against it. I think it’s best to avoid granting equity stake if at all possible, preferring instead incentive pay, or profit sharing, or other bonuses tied to performance.

I often hear owners and entrepreneurs say “I can’t afford to pay someone a huge salary, so I’ll just offer them part of the company”. Well, unless that person’s skills are a keystone to your success, I don’t think that’s the best solution. Business owners should not be so quick to give away part of their company when there are other ways to incentivize and motivate employees with bonuses, commission or increased benefits.

Incentive plans should be customized to fit your business and should be carefully designed to correlate the award with the desired goal, while avoiding unintended consequences.

For instance: If employees are rewarded simply for the number of sales they make, their behavior (rushed, impersonal) may be such that customer service is sacrificed. But if worker pay is dependent on customer satisfaction, then other types of behavior (courteous, helpful) will be reinforced.

Incentive plans come in all stripes and can focus on short-term or long-term goals, can be individual or team-based, can be paid in cash or increased benefits and perks. The bottom line is getting employees to have skin in the game and to know that if they contribute to the success of the company, they too will benefit.

Some tips:

Simplify. Simplify. The best plans are easily explained and understood.
Communicate. Employees should be clear on what must be accomplished to be rewarded.
Align incentive and rewards with company goals.
Pay out often. Once-a-year bonuses do not motivate as well as monthly ones.

So yes, the devil is in the details with incentive plans, but it’s much better than chipping away at your company’s equity. Consider that only when there’s no alternative.

Additional resources

https://www.nceo.org/articles/equity-compensation-startup

http://www.inc.com/guides/hr/20697.html

http://www.geekwire.com/2011/wrotng-answer-5050-calculating-cofounder-equity-split/