How much should startup employees be paid? What about the CEO? Is it better to reward employees with equity than with high salaries?
In Zero to One, Peter Thiel addresses the issue of startup salaries. He explains that the CEO’s pay sets the bar for everyone else, so you must exercise caution. He also shares his advice regarding equity distribution from the outset.
Here are some things to consider when setting your employees’ salaries.
Thiel cautions you not to overpay your CEO. In his view, paychecks motivate people only in the short term, because pay is derived from the present value of the company, not its future value. This can be especially problematic at the executive level since it’s crucial to have a CEO with a vision for building the company’s future. Paying your CEO too much can undermine her motivation to do whatever it takes to reach the company’s long-term goals.
Additionally, the CEO pay sets the standard for startup salaries for the rest of the company: If she draws a fat paycheck, her subordinates will expect proportionally high compensation. If she covers up problems to make the current situation look better and thereby protect her short-term interests, her subordinates will do likewise. But if she addresses problems head-on and works for the company’s growth in the hope of future rewards, this may inspire her subordinates to do the same.
Similarly, Thiel argues that offering employees high salaries or cash bonuses makes them more prone to focus on looking good in the short term rather than making the company prosper in the long term.
He says that it’s better to reward employees with equity in the company because it gives them a stake in the company’s future. However, he concedes that it is difficult to distribute equity in a way that seems fair to everyone. Typically, employees who start earlier get larger shares of equity. This is fair in the sense that these employees took a greater risk in joining the company, but it doesn’t necessarily scale with their contributions to the company’s success: the company’s first janitor might end up owning more stock than the engineering manager who was hired a few years later to scale up their production operations. He recommends keeping the allocation of equity confidential to prevent it from becoming a source of resentment between employees.
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Here's what you'll find in our full Zero To One summary :
- Why some companies genuinely move the world forward when most don't
- How to build a company that becomes a monopoly (and why monopolies aren't bad)
- Silicon Valley secrets to selling products and building rockstar teams