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Performance Management at Startups

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Adjusting Compensation

Unless an employee’s job changes, his or her salary shouldn’t change.
Homebrew advises startups to adhere to a simple philosophy around compensation increases or raises. Unless an employee’s job changes, his or her salary shouldn’t change. Raises should be given when there is a promotion or change in scope of someone’s role.
If someone is coming from a larger company, they may expect an annual raise regardless of performance or promotion (anywhere from 3-5%). Make sure you set expectations accordingly early on and be clear with employees that raises are tied to promotions and/or changes in scope of role.
Are there exceptions?
Of course. If someone is taking a large cut in base and/or bonus when hired, salary probably needs to be revisited when the company raises additional capital (typically at the A or B round). Make sure you do this for all employees who are under market and be consistent using salary bands targeting the 50th percentile for base salary.
*Please note these are recommendations from the Homebrew team… not hard rules. Please refer to our document for more detail.

Bonus Plans

Employees in non-revenue generating roles (everyone but salespeople) will likely not have an individual or company bonus as part of their compensation plan. Startups are usually cash constrained and employees are rewarded with equity, which is a longer term incentive. Once a company becomes profitable, then it is time to set up a company wide bonus plan.

Why and when should you set up a formal bonus plan?

There are several reasons why companies implement bonus plans and many early stage companies put it off as long as possible. Bonus plans require a lot of paperwork and maintenance. There is always the risk of employees getting overly focused on the actual bonus rather than what is really important.
There is no magic employee number or stage in financing when companies decide that it is time to put in a bonus plan. It is different for each company and ties back to its general philosophy around compensation. Companies may put a bonus plan into effect to remain competitive in the market for recruiting purposes. For example, a company needs to make up for a gap in base salary and a bonus plan can help close gap this with additional cash.
Bonuses are a great way to reward strong performers. A bonus plan is usually tied to a rating system and the strongest performers expect the highest bonuses. Until a refresher grant system is in place, a bonus plan may be a way to incentivize employees.
Bonus percentages are usually tied to level and weighted by individual performance and company performance. The more senior the employee, the more heavily weighted the bonus is on company performance. For example:
Individual Contributor: 90% employee performance, 10% company performance
Manager Level: 85% employee performance, 15% company performance
Director Level: 75% employee performance, 25% company performance
VP/SVP: 50% employee performance, 50% company performance
C-Level Executives: 100% company performance

Here’s what a rating system of 1-5 looks like.
"1" does not meet expectations, 70% of bonus
"2" meets some expectations, 85% of bonus
"3" meets expectations, 100% of bonus
"4" exceeds some expectations, 110% of bonus
"5" exceeds all expectations, 120% of bonus

Bonuses are usually paid out at end of year after an annual review. However, since we recommend ongoing reviews and continuous feedback, you can pay out bonuses at the time that works best for financing/budgeting. Some companies break things up and pay 75% of the bonus in January and the other 25% in July. This is seen as a retention tactic in addition to a budgeting strategy.

Spot Bonus Plan

Spot bonuses are usually cash bonuses given to an employee for recognition of outstanding work by an employee’s manager. Spot bonuses can also be more personalized and non-monetary, such as a gift certificate to a spa or favorite restaurant.
A spot bonus plan provides an off cycle bonus to reward performance when a job or team does exceptional work. An easy way to implement a spot bonus plan is to give each department head a certain amount of money for the year that they can use for spot bonuses.

Peer Bonus Plan

Some companies have a peer bonus plan where someone can nominate a peer for a bonus for work well done rather than having it come from a manager. Peer bonuses tend to be smaller in terms of cash amounts or can also be in the form of gift certificates.
The best way to implement this type of a program is to have a maximum number of “nominations” per quarter for each employee (2 is a good number). This can be done through a simple online form or email alias. An employee submits a name with some context as to why they are recommending an employee to receive a spot bonus. The department head reviews the recommendation. Some type of recognition at quarterly/monthly all hands meetings is recommended for approved spot bonuses.

Stock Refresh

Additional equity grants (otherwise known as refresher grants) should be based on performance and not awarded until an employee’s 2 year anniversary (assuming there is no change in title or performance). Seniority is a factor to consider. We recommend refreshing employees at the Director level and above at the 2 year mark and below the Director level at the 3 year mark. The most important thing is to have a defined philosophy around compensation and equity upfront. Be consistent and do not be afraid to enforce this policy.
How mature should the company be in order to start a stock refresh program?
Most companies that are getting to 4+ years in life cycle are doing them.
What about vesting? Does the schedule change?
The vesting schedule should remain the same as the original grant. Some companies will drop the one-year cliff.
What is the amount of a typical refresher grant?
Grants are most often given as a percentage of the employee’s new hire grant (approximately 20-25% of an employee’s new hire grant).

Final thoughts…

The talent management market is a 5 billion dollar industry according to . This should come as no surprise considering the 3 major challenges for growing companies are:
Retention, engagement, and culture
Building a global leadership pipeline
The need to revamp and improve employee learning

It's time to start thinking about implementing a performance management system when your company is ready to do formal reviews and keeping track of all the data feels like an administrative burden. If you have an in-house HR person, he or she will see a need for this tool given the amount of data to collect and process during review time.
Many companies take the approach of “We seem to have everything under control with a spreadsheet.” This may work for a company of 20 people, but collecting and maintaining feedback and tracking goals is not an easy task as your company grows. The process needs to be a live, collaborative process, not something that sits on a spreadsheet that one person manages.
If you don’t have an internal HR person, whoever is running the review process will see the need for a more organized, systematic approach. If the person in charge of this data were to hand off this process to someone else in the midst of a review cycle, how seamless would the transition be? Without any type of performance management system, we all know what the answer would be. If the data is organized and up to date, anyone can come in and take over the process. Your people are your most valuable asset so make sure this information is well maintained. Today’s tools are easy to use and cost effective. A successful performance review process will result in promotions, career movement, and identification for areas of improvement. In order to track this information, the right systems need to be in place.
Please feel free to reach out to Homebrew’s Head of talent with any questions.

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Updated 12.1.23

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