Why founders should base their own pay on performance
Tuesday, April 4, 2017/
Startup founders should consider adding a performance-based component to their own salaries, according to accounting advisor Filbert Tsai.
Writing for Tech in Asia, Tsai says many founders traditionally draw a salary for their work, in the same that employees of larger businesses get paid each fortnight or month. However, he believes founders should structure their pay into two parts: a baseline salary and a performance-based salary.
A traditional payment for work structure that isn’t tied to performance and that gives founders, and even employees, recurring income regardless of the quality or quantity of work can fail to “motivate” all hands on deck, says Tsai.
“If everybody receives the same amount of salary each month, you’ll start second guessing one another’s work in a matter of months,” Tsai says.
And over years, he believes, this can bring more damage.
On the other hand, Tsai says using structures that incorporate performance-based pay can benefit both the founders and the business.
“By focusing on performance payment, each individual drives the business toward the same goal. There [is] no second guessing, there’s just a scorecard. You don’t have to doubt because everything is clear and agreed,” he says.
“And of course, performance [pay] should be based on your startup’s excess income and cash. If you’re just paying out excessive amounts for performance then that performance might as well be short-lived.”
In addition to this, Tsai says, equity bonuses can also help encourage new teams to really come together and build a robust business. When founders, and employees, share equity in the company, he says, it can create a sense of ownership and motivation to see the startup flourish.
However, Tsai says it’s critical that founders develop an understanding of local laws and regulations in relation to such arrangements.
“Equity instruments are crucial tools that startup founders need to understand,” he says.
“These can help you create a better employee benefit scheme and profit distribution scheme.”