It's almost become standard for a tech company's compensation plan to be based on the tech trifecta: base, bonus, and equity. However, plenty of tech companies choose not to include a cash bonus in their compensation plans. Today we explore why this is and how the decision not to have bonuses impacts attracting and hiring talent.
Despite rumblings of a recession, the market is still in a state of 'war' over talent. Salaries are at all-time highs, signing bonuses have returned to roles outside of a company's SLT, and virtual 'help wanted' shingles are hung on the web windows of almost every tech company around the world. Our conversations with Founders, CEOs and Heads of Talent confirm that hiring talent is often the number one or two biggest challenge organizations are facing.
How, then, can it be that some companies are attempting to recruit talent while not offering cash bonus plans? Here are the two main reasons why and what employers need to be mindful of when attracting talent in this market.
Companies Without Bonus Plans
Pre-Series A Funded Startups
This should not surprise anyone in the tech world. Any startup that is working its way towards securing a first formal round is also working hard to attract the employee persona who is entrepreneurial and a builder.
Those builders who have been bitten by the startup bug long ago and thrive in a nascent, risky, and "figuring things out" environment needed to stand up a business. Where often a bonus is outweighed by opportunity.
For Engineers: it's the opportunity to live the life of those who came before them; the coders who worked out of dorm rooms or their parent's garage and built the companies that are household names today.
For Product Managers: it's the opportunity to take a Founder’s napkin drawing idea and bring it to life. To solve a problem that will unlock a future of growth and the opportunity to build a business.
For Marketers: it’s the opportunity to define a brand, its messaging, and the basis upon which all other marketing programs and campaigns (and the business!) will be built.
For Sales: it’s the opportunity and street cred of getting a high-profile enterprise to become a beta customer or possibly even partially fund the development of the solution.
For certain employees, it’s their preference to work for pre-Series A as teams are small, agile, and quick to make decisions. Where Founders know everyone by name and are likely to involve employees other than senior leadership in decision making.
The trade off is, when the cash is only flowing in one direction (out), it is to be expected that cash bonuses will most likely not be included in any comp plan. While we have seen some exceptions to this (such as offering a cash bonus at year-end based on a specific growth metric the company is working towards), it’s an exception, not the norm.
The Founders Don't Believe in Bonus Plans
Everyone has differing approaches to building companies, and comp plans are no different. Some Founders just don't believe in bonuses - plain and simple.
Sometimes that's because those Founders were at once employees. Some may have personally experienced comp plans that were built in a way where bonuses weren’t often paid out.
We've also worked with leaders who have admitted that "our bonus plans are pretty much guaranteed payouts. If you show up, you can expect to get 100% of the bonus". Which can cause others to wonder what's the point of it being a bonus?
For these reasons (and more), some Founders choose to shirk what seems to them as performative nonsense into competitive base salaries to attract the talent instead.
How to Hire Without a Bonus Plan:
Not having a cash bonus doesn't exclude companies from the same challenges every other employer seems to have when hiring talent; in fact, it often creates more. So if you now find yourself hiring without a bonus plan, here’s how to set the stage for success.
Some candidates will perceive an employer who doesn't pay bonus plans as stingy or cheap. For this reason, extra effort needs to be applied at the offer presentation stage to educate a candidate on why the comp plans are structured as they are.
Assume it will need proper positioning and messaging, and find the time to do it. Don't wait until the process is nearly complete and lose the candidate based on their incorrect or incomplete assumptions.
Cash is King
Based on our 70+ placements so far this year, the average bonus plan comes in around 15-20%. So to remain competitive, companies without bonuses need to raise their base pay (i.e., if the average base salary is $100K, then add 20% more to factor in an OTE of competitors - an offer of $120K base is needed.)
It seems straightforward, but things can get complicated, considering many bonus plans (in specific fields) are uncapped. If a company has a successful year and pays out an average of 140% of a bonus plan, then that offer will be more attractive to someone who is evaluating purely based on compensation opportunity.
Therefore, many companies that don't pay bonuses are in the position of having to pay higher base salaries. How high? Well, that depends on the skills needed to hire and the availability of talent.
When an employer is a startup, meaningful equity remains an attraction tool for hiring tech talent. It unites the team to the greater outcome they are collectively trying to achieve together. There are many ways to use stock options to recruit employees that can be just as enticing as bonuses.
Depending on the maturity or brand of a company, recruiting without a bonus plan is not a hiring death sentence; it just requires a little more forethought, planning, and messaging to entice potential employees to join.