In a previous article, I discussed the 4 questions early-stage companies should ask about each employee to determine whether an annual raise is recommended in that employee’s case. But, many employees will not fit into those categories (e.g. there is not a case-specific reason for a salary increase) and leaders have to make the decision about whether they’ll give annual raises to the rest of the team.
Usually, when Founders decide to forgo across-the-board raises at early stages, it is because they don’t feel comfortable increasing salaries before raising their next round. They believe that tying raises to company-level milestones aligns incentives across the team and makes sure that the company’s payroll costs are increasing only in parallel to its financial resources. This reluctance is understandable and often justified.
Note before we get started: I’m not here to convince anyone that they have to give annual raises to every employee at the early stages of their company. Too often, HR insists on raises because they want to make employees “happy” (I put this in quotes this is usually ill-defined, means something different for each employee, and is more emotion-driven and less strategic) or because, for better or worse, the tech industry culture has conditioned employees to expect annual raises and they don’t want to disappoint. But, these aren’t good enough reasons to give raises if there are compelling reasons to skip them. So, how do we make and, more importantly, explain this decision once we’ve made it?
Checking our Assumptions
Regardless of the operating assumption, HR should always approach a decision like this with an eye towards encouraging strategic thinking and maximizing fairness. Even if a CEO has made up their mind, I recommend a formal discussion at the leadership level about the pros and cons of skipping raises this year. In this conversation, we should ask ourselves a series of questions. For instance:
- Have our employees consistently gone above and beyond and reached their goals? Even in small companies, employees often feel that their individual work is only tangentially related to company-level achievements such as a fundraise. If they’re working hard and doing everything asked of them, they may be frustrated to have their compensation increase conditioned on things outside their control. Let’s be critical of the assumption that tying a salary raise to a fundraise will actually drive desirable employee behavior if they don’t see the connection between their own work and the goal or if the fundraise is too far in the future.
- Will most employees get raises for case-specific reasons, leaving only a few who will not? Perhaps we know that most of the team will receive raises for one of the 4 case-by-case reasons, leaving only a few who would not. We may prefer to give raises to these remaining employees, even if they’re modest, to avoid feelings of exclusion or mistreatment, especially if they’re important contributors. Let’s not forget that, on one hand, employees will talk amongst themselves about salaries and raises (a topic for a different article) but, on the other hand, they often don’t understand the specific context of their peers. In other words, they’re likely to know that another employee got a raise and they didn’t. But, they’re unlikely to know that the other employee was underpaid compared to benchmarks, was a top performer, or had a change in their role. Deciding to grant universal raises can help to lessen the impact of this information asymmetry.
- Have we promised a raise in the past or implied (even accidentally) that they’re guaranteed? It’s important to audit past conversations between leadership and employees (even in informal or 1:1 settings) to make sure that there is no expectation of a raise based on things we’ve said. If we’ve made promises in the past, trust that employees will remember them. Contradicting them can require additional communication and planning.
- Are we nearing a funding round with a high level of confidence and/or will the impact on our runway be minimal? As I mentioned, tech industry culture teaches employees to expect annual raises. That is not a reason to grant them, but deviating from industry-wide expectations can require additional effort so that employees don’t feel undervalued compared to their peers at other companies. If the company can responsibly absorb the cost or is nearing a fundraising milestone anyway, it may be good for morale and, more importantly, avoid a situation in which, immediately following the fundraise, every employee expects a (much bigger) raise at the same time.
Again, the goal of these questions is not to change a CEO’s mind (though it sometimes happens naturally). Rather, it’s to create a culture of deliberate decision-making around HR and set a foundation for the company’s governing HR philosophies. At the end of the day, the answer is often still no: we will not be giving default raises at this point. Now, how do we communicate it to the team?
Communication Principles
Transparency.
I have often seen leaders fall into the trap of thinking that their primary role is to be unfailingly optimistic. These leaders sometimes think that even talking about the company’s runway or the need to be conservative with spending can send employees spinning into a crisis of confidence. This fear of discussing anything that could even be perceived as vaguely negative, though widespread, is destructive. It doesn’t give employees nearly enough credit for their ability to grasp the nuance of business decisions. It underestimates their openness to accept things they don’t like when they are presented with clear and logical reasoning. And, it ignores the fact that employees often have an excellent BS radar; sugarcoating things is a guaranteed way to lose credibility.
If you are not going to give annual raises at this point, explain why. Explain the need to balance financial stability and employee satisfaction. Walk them through your reasoning and pull back the curtain on how decisions are made at the highest levels. This exercise in transparency pays dividends; it builds your credibility, it makes them feel included in the operation of the company, and it demonstrates that you are approaching these questions thoughtfully and empathetically. Trust me – your team will appreciate the candor even if they’d hoped for a different outcome.
Provide Predictability. Set Expectations.
Uncertainty creates anxiety. Most employees would rather a timeline they dislike to no timeline at all. So, if you’re skipping annual raises for now, let the team know when you’ll revisit the issue, even if you end up reaffirming your current decision at that next decision point. If the decision is based on milestones, it’s critical to share what they are and how they factor into your approach. This avoids a black box of decision-making in which employee assumptions tend towards the worst-case scenario (“I’m never going to get a raise” or “maybe I need to ask them every week so they don’t forget”).
Avoid Over-Structuring.
While we want to provide predictability, we want to avoid doing so in a way that creates the impression of inflexibility or bureaucracy at such an early stage. First, this means reiterating that these decisions are subject to change; that you’ll be monitoring, revisiting, and promising ongoing, transparent communication. Second, it means being very careful about setting up too many processes that create overhead. For instance, in a company of 15 people, you probably don’t want to address the question of salary raises by implementing formal, bi-annual performance review processes and finance-based salary adjustment models. Even writing that is exhausting. While it can be tempting to create something “scalable” or “structured,” it is far too heavy a solution. Third, it requires finding a balance in your communication between transparency and too much detail. While employees are usually good at understanding high-level business considerations and trade-offs, they often have limited context for overly-detailed explanations such as industry benchmarks on recommended runway, finance mechanisms for calculating raise amounts, etc. The mission here is to be thoughtful about sharing only the information that 1) provides context, 2) builds trust and 3) is at the right level of granularity.
Invest in 1:1 time.
Small companies still have the opportunity to communicate directly to every member of the team – use it. Communications about company-wide decisions don’t need to start and end with a single all-hands meeting. Instead, tactical investments in 1:1 conversations (before and/or after) can be a powerful tool to build consensus and collect feedback. Each employee has their own perspective, priorities, concerns, needs, wants, and goals. Use your understanding of these motivations to tackle sensitive cases in a more tailored way. Explain how your thought process applies to their specific situation and handle their questions in a much more intimate setting.
It may seem like these personal chats are redundant. But, I believe that they complement a more formal conversation by giving employees extra time to process information and ask questions. And better to be proactive about addressing concerns than letting them percolate so that employees come to you already frustrated. This also means that the team-level conversation can be less about “delivering news” (these things can seem dramatic and ominous) and more about contextualizing, alignment, and re-focusing on the company’s goals and trajectory. And it means there are no surprises – no one likes surprises.
These meetings can be as informal as you’d like, done by Founders or managers, and can be part of a company-wide communication plan or held with certain individuals. The key is that they are personalized and deliver messages consistent with the overall rationale of the decision.
Two additional notes:
- I referenced earlier the need to avoid giving raises just because you think employees expect them. This is especially true in situations where the most of the proposed raises are truly minimal (2-3%), which often happens when companies want to give employees a token gesture while they wait for a fundraise. I have seen that employees often respond poorly to this approach; they see it as a de facto non-raise and think that the company is stringing them along for another year. Obviously, there are many reasons (performance, benchmarks on the team, etc.) why an individual employee’s raise would be small. But, if you’re waiting for a fundraising round or see a clear scenario in the near to mid-future that would allow you to give more sizable raises, you might consider waiting (or at least communicating that additional raises will provided later). With the right context and transparency, employees will appreciate the candor more than a 2% increase meant to hold them over for a year.
- Be cautious about connecting raises too directly to fundraising. At early stages, financial constraints usually do mean that fundraising and raises are closely tied – this is understandable. But, as your company grows, you’ll want to implement more standardized salary adjustment processes that should operate independently from fundraising rounds in order to maintain predictability and clarity. Setting this expectation early – that fundraise does not always equal an automatic raise – will save you a headache down the road.
This is a lot of advice. A lot to keep in mind. To be clear, this isn’t a suggestion to over-engineer a communication process that should be relatively simple and straightforward. Rather, the advice is designed to push thinking in a more structured and organized direction; more a framework for discussion than a checklist of how and what to do. Once you’ve thought through things and asked the right questions, then it’s time to figure out how to execute it in the most efficient, clearest way possible. But, investing in the strategy before executing is a worthwhile investment.
