My first employees are reaching their 1-year anniversary – do I need to give them a raise?

The question of whether to give annual raises can be a tricky one for early-stage startups, especially those that have not raised money in the last year. As employees hit their anniversaries, leaders try to navigate between employee expectations and business considerations. Because these companies usually have no formal review process or raise schedule, it can be uncharted territory.

Fortunately, their size and lack of structure usually gives these small companies the ability to consider things on a case-by-case basis. So, when we talk about whether to give or not to give an employee a raise, I start by asking whether they fall into any of these 4 categories:

1. Is this employee paid far below market rate? Obviously, many early-stage companies pay at the lower end of the salary range for a given role, but here we’re looking for extreme deviations from benchmarks. These situations often occur when early employees join right around the first fundraising rounds, under the assumption that the company will adjust their salary as it grows and stabilizes.
2. Did the employee’s responsibilities shift dramatically in the last year? As companies grow, many early employees move into management or more strategic roles. If their role changed materially, a raise may be due.
3. Are they a key player or extraordinary contributor? Raises can be good tools for retention and indicators of appreciation. In these cases, it’s also good to think about other levers as well (e.g. options, bonus, title) that show appreciation without the long-term impact of increased salary.
4. Is there a fairness issue? A growing team raises the risk of similarly experienced employees doing similar jobs with dramatically different salaries. This is usually a result of offer negotiations, when people join, and a lack of structure, not any ill intentions. But, annual raises provide an opportunity to maintain equity across the team, which is critical to maintaining a stable, transparent culture.

 

Assuming that an employee doesn’t fall into one of these categories, should the company still feel obligated to give them an annual raise if they haven’t raised money in the last year? If so, should the default be a minimal cost-of-living increase (2-3%)? More? As far as I’m concerned, there’s no right or wrong answer – but there are lots of opinions! Looking forward to hearing them.