Salary structure for start-ups & SMEs

Salary structure for start-ups & SMEs

Entrepreneurship is a great feeling for many. The shear thought of moving from a salaried employee to an employer and getting to make a difference in employees lives is a great feeling. To achieve your growth objectives as a company, it is important that you are able to attract the right talent. 

A very important aspect in recruiting the right talent is being able to offer competitive salaries and flexible tax structures. People join small companies because they love the flexibility and freedom. What should your salary structure be? Compared to the industry, should you be paying more, or at par? How do you take care of ‘take home’ challenges that employees demand? Several of these questions come up quite regularly. 

Small companies try to keep their salary structures tax friendly but have to make sure that they are scalable as more people join in. They also need to ensure that it does not become complicated for finance/accounts team to manage this, on an ongoing basis. 

Well, then how much should start ups really pay? There’s really no clear formula for companies that are just starting up. Some clever financial juggling by your accountant could even ensure that the take-home pay at the end of the month is even lesser by bi-furcating the compensation into monthly and annual components. This will help you in case of stuttering cash flows.

Following are few approaches that can help you to define salary structure for your Start-up

Employees’ salaries should grow with the company

This “category” of employees need to work out a time table where compensation is concerned. Obviously, in the gestation period, partners or founders may have to make do with the bare minimum wages. They need to fix this period, which is also tied in to their company’s business plans. The company grows, so will their compensation packages, that is logical. If the firm is not growing, it means something’s not working out right, which could also be because of a partner’s inability to deliver the goods, which in turn means he does not deserve a pay hike anyway, going strictly by the performance criteria.   

Link wages to their results   

People you hire should be made accountable and should be tied to results, and the wages should be linked to the business they get to the table. They should know that if they perform better, they will get more money at the end of the month.

Fixed vs Variable pay

The pay package should be a mix of fix and variables based on performance, advise almost all HR experts. By and large, one thumb rule that may be applied across almost all sectors is – junior employees who have very little influence to determine your company’s fate should get 90 percent fixed pay and the rest as variable. Earlier, this category would receive a fixed, 100% salary at the end of the month, but nowadays, the variable component of a salary has become the norm. So, the fixed versus variable percentage depends a lot on the employee’s seniority and his deemed role in your enterprise.

Even of the variable pay component, about 90 percent should be tied in to an individual’s performance while the rest should be on the overall performance of the company.

Check the market scenario

While deciding on the wages, a lot also depends on the market scenario. You must try to find out and quantify the value of the person based on his experience and the potential he has.     

Competitive factors also a play a crucial role while fixing someone’s remuneration. You have to find out the person’s market value. 

The higher the flexibility, the better it is from an employee’s viewpoint, but the question to ask is – Is your system scalable as you grow and are you creating too much complexity for your finance/accounting departments. It is always a balancing act and Finsmart has worked with several firms across different industries helping them define a scalable and hassle free salary structure for them. 

As you negotiate your challenges, keep in mind that help is just a call away.

Salary structure for stratups & SMEs

Challenge – Get the right talent, need to give right compensation

Salary structure with is tax friendly

But you don’t want to complicated to manage it for the admin

How do you create balance?

Create a hierarchy of designations and payroll grades

This structure will help you to be flexible and scale when your employee strength grows

Flexible to employees for their income tax

Which type of company formation will suit your business

There are 4 company types in vogue

If you are a lone entrepreneur and you don’t intent to have an equity partner or sell your business to an independent stake holder or you are not looking for funding then sole proprietorship is the easiest and fastest means to get started in business

Only need a shop act

Group of individuals – Partnership – Need to have a partnership agreement signed by all participant, which states nature of business, nature of responsibilities/roles, compensation, exit criteria if someone wants to leave

LLP – More formal association

Compliances involved are less

Not much popular in India

Private limited

Falls under company’s act

Complex and lot of compliances are involved

But it is easy to scale

Get acquainted with tax registrations that apply for your business