On day 31 of the 90-day challenge, we’re covering the topic employee compensation. What are the 3 ways to compensate employees and what are the pros and cons of each? Find out in this article.
Salary
A salary is the most common form of employee compensation. You receive it every month, and in some cases, there are 13th and 14th-month salaries. It’s predictable and provides financial stability. However, a salary also has its downsides. For the company, especially as a startup, it can be very expensive because cash is essential. For you as an employee, a salary is often tax-disadvantaged.
One strategy I recommend is to reduce the salary and utilize other, more tax-advantaged forms of compensation. It’s worth comparing different compensation packages and benchmarking both internally and externally to ensure the compensation is fair.
Stock Options
The second major form of compensation is stock options or company shares. The advantage for the company is that no immediate cash is needed. For you as an employee, it means you have a stake in the company, which can offer high potential returns but also carries risks.
It’s crucial that your salary covers your fixed costs. It is extremely risky to rely on the company’s success to make ends meet. As a CEO, you must think defensively and ensure that your employees are financially secure.
Stock options are the way generational wealth is built. In our company, for example, I bought back stock options to ensure that the employees who worked hard didn’t end up empty-handed. This was a personal decision that not everyone would make, but I found it fair.
Commissions
The third type of compensation is commissions, which work well primarily in sales and marketing. They are performance-based and can be beneficial for both the company and the employees. It’s a good way to directly reward performance.
Currently, we mainly have salaries in our company because we are in a transitional phase, and other forms of compensation don’t make much sense right now. As a decision-maker, you need to find the right balance between salary, stock options, and commissions.
Conclusion
Whether you are an employer or an employee, it’s important to understand the different forms of compensation and find the right balance. If you only want a salary, you should ask yourself if it’s because you don’t believe in the company or yourself. See you tomorrow for Day 32!
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Your Julian
Entrepreneur / Investor / Athlete / Father
