Course Name: Organizational Behavior For full credit, format your paragraph for
ID: 394101 • Letter: C
Question
Course Name: Organizational Behavior
For full credit, format your paragraph for each question in this format:
Topic sentence. First supporting sentence. Second supporting sentence. Third supporting sentence. Concluding sentence.
You were asked to join a new software startup because you were one of the standout students inUD's ENM582 class last semester. The company is a new start-up and so far, no salaries have been given out. Moneyis starting to flow into the company as sales have started to increase. Your partner wants you to set up acompensation system for the managers, sales force, and the programmers. Pick one of these job categories andrecommend a pay structure for it. Support your reasoning.
Explanation / Answer
Designing a compensation structure for startup employees is always a challenging task. This is because the functioning of a startup and it's life stages are vastly different than those of an established firm. As a result, the compensation structure will also be different than that of mature companies.
Proposed compensation structure for programmers:
I propose compensation structure comprising the following components:
Salary
The salary for a programmer (Fresher or with little work experience): USD 86,000 p.a.
The salary for a programmer (Experienced): USD 1,20,000 p.a.
A written agreement will be signed with the employee guaranteeing a pay increase once the company raises more capital.
Benefits:
Apart from the above mentioned salary, the employee will get the following benefits:
Stock options
The employee will have the option to acquire 10,000 shares of the company at 20 cents a share (assuming that is the market value at that time) subject to a 4 year vesting period with the condition that he stays employed for atleast one year before he can exercise the option to buy 2,500 shares. Post that he can vest the remaining 7,500 shares at the rate of 1/36 a month for the remaining 36 months of his employment.
Rationale behind the proposed compensation structure
As an early stage startup, the compensation structure has been designed in a way that the salary and benefits will be lower as compared to stock options. However, as the company starts generating greater revenues and raises more capital, the salary and the benefits component will increase. The trick is finding a balance between cash and non cash components in a way that the employees will not feel underpaid and at the same time will stay motivated. Compensation structures are often motivated by cash requirements, accounting impact, tax implications, etc.
Cash is extremely crucial for the survival of any startup. So it makes sense for a startup in the initial stages of business, to offer a lower cash component and utilize it for working capital purposes, research & development, etc. As the company matures, the salaries will get closer and closer to market rate.
To compensate for the slightly lower cash component, non cash benefits and stock options are offered to sweeten the deal. As the startup grows, the benefits will also increase. Presently, the benefits which cost the least, have been offered.
Finally, we come to the stock options component which is the most attractive and intriguing part of any startup compensation structure. Through stock options, employees are given the option to purchase equity in the company at a heavily discounted price. Equity is the great compensation equalizer in startup companies—the bridge between an executive’s market value and the company’s cash constraints. At the same time, offering a 4 year vesting period ensures that the employees stay loyal to the company. Equity isn’t an alternative to cash, but it is an important component of a well-rounded compensation strategy.