This series tells stories about frequent errors in Startups and growing companies. In case you haven’t read the previous post about the danger of risking lighthouse projects, you can do so now.
This chapter will deal with the threat of hiring an expensive professional at unreasonable cost and risk.
Chapter IV: When the hiring of a pro turns into a killing field
At some stage of the evolution of a Startup or small company most of them run into the question, if they should build a board of influencers or hire some “professionals” to take the next step.
Everybody knows: A true professional will not be cheap. But on the other hand: Such a heavyweight can have unmeasurable value.
The light above such miraculous people shines bright. The value of such a wonderboy or wonderwoman is very difficult to figure out, but measured by the value of the expectations, salary will probably be higher than what the company owners took out the last years.
By the way: I am such a wonderboy. So buckle up if you ask me about my salary expectations.
For those who didn’t take the cite for a joke: It was a joke.
Before I start diving into the story, I want to clarify and recommend some things:
- It can truly be helpful to have advisors aboard.
- It can truly be helpful to have one or more wonderboys or wonderwomen aboard.
- Don’t calculate salary based on miraculous assumptions.
- Former success of a pro is no grant for future success.
- Don’t undervalue the work of the founders. A good pro will find fair compensation solutions.
- Be sure to fully understand and qualify your own expectations.
- Be sure that the candidate overperforms on your expectations.
Don’t run into the trap of hiring people that earn far more than anybody in the company has ever earned before. Chances are higher to fail than to succeed. I saw dozens of companies run into the trap of agreeing to absolutely inacceptable salary conditions with fixed contracts and not existing or weak conditions for underperformance.
Some of those companies died because of hiring an overcompensated “professional” that turned out to be a whisk.
So now that you are prepared, I am diving into the story. But this time, I show you how the salary of a pro can be calculated and negotiated.
You: “After working together for 2 weeks now. What are the strongest points from your point of view to hire you?”
Wonderboy: “….” (convincing arguments) PS: If not convincin: Save your time.
You: “Great, I agree, we found a wonderful base together. After you know our situation well enough, including finance, what is your proposal for compensating your work?”
Wonderboy: “You know, ahm..over the last 4 years, I had ..ahm..an annual compensation of 350 TUSD. Plus benefits. And car. Not to forget…ahm..a secretary. And.. you know… I have expenses.”
You: “Stop dawdling. I make my proposal”.
Wonderboy: Silent. And a bit less miraculous this time.
You: “Let’s work out on mathematics. You agreed that your duty is to raise net earnings in the company from 750 TUSD to 2 Mio USD within the next 3 years. This is an average increase of about 420 TUSD per year.”
Wonderboy: “Sure, that’s the plan.”
You: “This means, a plus of 420 TUSD net earnings equals 100% of your target based on the last balance sheet regarding accrual accounting”.
Wonderboy: “So far, I can follow.”
You: “100% target fulfilment can equal a salary of 200 TUSD. Each 10% of overfulfilment will deliver you an additional 25% of the net earnings YOU made. The base salary of 72 TUSD a year will be paid if you underperform by 70% (or better: a target fulfillment of 30%)”.
Wonderboy: “This starts getting complicated. Do I understand your offer right? You pay a base salary of 72 TUSD? And only if I reach 100% of my target, I have a chance to get 200 TUSD? ”
You: “The cornerstones are right. But the details are not. I assume that your plan of raising the net earnings is what you believe you really can deliver.
If YOU don’t believe in your capabilities, why should we do? And of course, your monthly payment will include a part of the expected achievements in commission in advance, e.g. 6 TUSD base salary + 3 TUSD payment in advance. Every three month your achievements are measured and you either get a payout or a deduction.”
You: “If your performance is as you say, your salary will rise according to earnings. And if you overperform the targets you set yourself as 100%, you have no limit. 10% overperformance equals 42 TUSD, where you get 25% commission (10.5 TUSD). So, if you perform at 120%, your salary raises by 21 TUSD. If you perform at 200%, your salary will be 305 TEUR.”
Wonderboy: “Ok, I understand the deal. And I understand, that your offer shares risks on your and on my side. Which makes me kind of an entrepreneur in your company.”
You: “You are right, that is what we are able to offer at the current stage”.
Wonderboy: “I believe in my abilities. And I believe in the company and the team. But the 100% compensation is a big step back looking at my last job. Let us add one option to the salary model and we make the deal:
For the next five years, whenever I achieve my target, give me 1% of the shares of the company. If I exceed my targets by 50%, give me 2% of the shares for that year. If I exceed my targets by 100%, give me 3% of the shares on top.”
Long Pause. You and wonderboy look each other deep in the eyes.
Wonderboy: “My offer is fair: If I really rock your company, I deserve up to 15% of the shares plus a compensation that is fair for all. If my performance is average or even below, you take no risk and I can’t live on the compensation. Latest after 6 month, we both will have the proof.”
Deal or no deal?
Lesson 4: Expensive, experienced staff hired on fixed payment contracts without variable binding to success can be killing.
I recommend: Try to find solutions that share risks. Wonderboys or wonderwomen worth their money are not afraid of risk. And typically do not run short on money, even though some of them come along as if they would starve when not receiving a pay check the next month. Don’t believe such tales.
Growing a company needs expertise, skill, people relations, luck and professional people aboard. In the critical phase of a Startup company, when growth seems to urge the hiring of a “big fish”, a lot of companies ruin their former efforts by wrong contracting.
Find a good model for sharing risks and success and you have made half the distance.
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