How do I design compensation + incentives for my team?

Common ground is found between the minimum compensation the individual would be willing to receive and the maximum the business is able to afford.

There are four primary ways a business can compensate someone (can be creatively combined):

  1. Hourly pay (+ overtime)
    1. Direct labor
  2. Fixed salary (+ bonus)
    1. Salaried employees
  3. Benefits
    1. Direct and/or salaried team members
  4. Commission
    1. Salespeople
  5. Equity distribution
    1. Owners/investors

There are two important aspects to consider when looking for a fair compensation structure:

  1. The minimum the individual would be willing to receive
    1. What is an industry standard?
    2. What were they getting paid previously?
    3. What are they hoping to get compensated?
  2. The maximum the business is willing to give
    1. What is the value to the business?
    2. When would it make sense to increase the compensation in the future?
    3. What other non-monetary ways can we provide value?

If considering equity as a compensation method, be sure that the individual is someone you'd like to be in a relationship for the long-term.

Also, it can be helpful to include a "buy back" clause in the compensation package that would allow the business to purchase equity back at a future date if the employee leaves.

One alternative to offering long-term ownership could be a share of profits each year/quarter. 

Instead of trying to negotiate the individual to the lowest possible point, consider finding a starting compensation level that honors them and still leaves room for an increase over time (as performance and results justify).

The reality is that finding fairness can be a complicated process, as human needs and desires play a key role. The more we can understand what is motivating everyone involved, the easier it will be to land on common ground.

One of our favorite videos is Simon Sinek talking about the importance of starting with "why":