Compensation in early stage teams

Written by
Milena Monova
Published on
March 13, 2024

Intro

Compensation is a difficult topic, especially when it comes to teams with limited resources. During my second month in the Co.Lab Fellowship I focused on studying and building a map of the compensation space, trying to categorize and understand all the social and practical intricacies of the topic. This article aims to summarize the space and bring clarity to the problems and important aspects to consider for finding a solution.

For context, here are the learnings from the first month of the fellowship.

Learnings from the Co.Lab Fellowship
Learnings from the Co.Lab Fellowship

The Problem

The primary problem I want to lay down is the challenge of motivating and rewarding contributors within an early-stage team, especially if the project is running on a limited budget. The founders struggle to find an appropriate way to compensate the teams fairly, as they don’t have the resources to give competitive salaries, at the same time, in order for an early stage project to become sustainable, the project needs a committed and motivated team. The contributors need to be confident that even with limited capital, they will be rewarded fairly.

Let’s start with a Why...?

My research showed that the topic is critical for several reasons:

  1. Sustainability: If contributors are not compensated adequately or fairly for their contributions, it can lead to dissatisfaction, loss of productivity, or even the loss of valuable team members.
  2. Longevity: Maximizing runway is essential for early-stage startups. The longer they can operate before running out of capital, the better their chance of reaching a sustainable income stream.
  3. Fairness: All contributors must be recognized and compensated for their efforts accordingly in order to build a solid and stable team.
  4. Onboarding: Projects need an easy way to onboard new members, and test their alignment and skills without hiring, because recruitment mistakes are too expensive in early stage projects.
  5. Decentralization: In order to keep the contributors motivated and build a good company culture, the evaluation of everyone's work and measuring value should not be done top-down, but rather in a collaborative manner. This keeps the contributors engaged, as they have not only “skin in the game” but also decision power.

Addressing these challenges is crucial to increase work satisfaction among contributors, boost team morale, ensure fair compensation.

Contributor Types & Motivations

Understanding the different actors and their needs and desires is crucial to grasping the overall picture of the problem.

It is important to acknowledge that not all contributors in a project have the same dedication and needs. In many cases the early stage contributors are financially stable people with high seniority level, who want to contribute from a place of deep belief in the founders and project. On the other side of the spectrum, we have bounty hunters, who want to do task-based work, paid immediately in cash. Those people might evolve into committed contributors with time.

There is a correlation between the motivation and the commitment of the contributors. The more committed they are, the more intrinsically motivated they are.

We can see commitment level increasing with increasing motivation and vice versa.

Contributor Spectrum Based on Commitment
Contributor Spectrum Based on Commitment

Defining Compensation Package for Contributor

There are two ways to evaluate a contributor's compensation package:

1. Based on a Formula

Teams that embrace a transparent compensation module, do that using a formula, where the parameters are:

  1. hours committed
  2. location
  3. market rate
  4. experience and seniority
  5. equity

The first problem with this is that the formula comes top-bottom, and contributors have very little space to give their input. Secondly, the formula have а missing parameter - team alignment, peers' appreciation and the invisible value brought to the team, that usually can’t even be properly pin pointed by the team members.

The solution to this having peer-to-peer approach on evaluating contributions. Leveraging on collective intelligence, to evaluate the subjective factors, is extremely powerful tool. It also boosts team harmony and trust, as all contributors have a space to feel heard and acknowledged.

2. Based on Negotiation

The most common way of coming up with a compensation package is through negotiation between the contributor and the managers/founders. The organization is willing to reward them depending on the negotiation skill and confidence of the contributor as well as the urgency. In many cases we can also see issues such as inequality arising, compensation being affected by gender, nationality, race etc.

The problem here is that this opens doors for unfairness and the solution to this is transparency.

We’ve seen many great examples in the last 10 years of how transparent compensation brings the team harmony to the next level, boosting trust, fairness and equality. Ray Dalio advocates for radical transparency to enhance decision-making, accountability, trust, and innovation. He believes open communication leads to informed decisions by embracing diverse perspectives. It also fosters accountability, as roles are clearly defined, and builds trust by eliminating hidden agendas. This approach, which encourages idea sharing and aligns with human desires for honesty and fairness, promotes an innovative, productive work environment.

The Compensation Package

Each compensation package includes monetary and non-monetary rewards. The balance between those is crucial for the motivation of the team members. As we stated earlier, the different contributors have different needs and motivations, and the only way to acknowledge this and build a model that works for the whole spectrum is to consider their input on their commitment level.

See the diagram below for further details.

Map of Compensation
Map of Compensation

Hypothesis

My hypothesis is that a healthy compensation model for early-stage teams is based on a balance between intrinsic and extrinsic motivation, transparency, and collective intelligence.

My research shows that a compensation model, supporting the needs of an early stage teams needs to have the following characteristics:

  • Transparency: Openness and clarity brings trust and solves largely equal pay issues.
  • Jointly assessed value added: Example for that is peer to peer assessment for measuring and evaluating contributions
  • Balancing Compensation Package with Contributor Motivations: Tweaking compensation, based on contributor's input on their level of commitment.

Video

Check out my video walk-through for more details and clarity.

What’s coming

The last month of my fellowship with RnDAO begins. Stay tuned for my comprehensive paper on the topic coming next month. 🚀🚀🚀