DO CONSULTANTS NEED TO RETHINK HOW THEY LOOK AT COMPENSATION IN A START-UP?

DO CONSULTANTS NEED TO RETHINK HOW THEY LOOK AT COMPENSATION IN A START-UP?

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What do people want from a start-up? Apparently, one of the answers is too much! We analysed the expectations of Movemeon’s 17,000+ members when they applied to positions and compared these expectations to what the job was actually offering. Segmenting this by industry made start-ups stand out as the area with the largest imbalance; where consultants were consistently requesting the greatest figures above the compensation on offer.

Within this, there was a marked disparity between early-stage start-ups and those that are more developed or venture backed. We hypothesised that this might be explained by three factors. Firstly, start-ups offer a better all-round career package with all sorts of non-monetary benefits and, as a result, don’t need to pay more. Secondly, we hypothesised that start-ups offer longer term rewards, such as equity, that aren’t reflected in the basic salary bandings Movemeon operates with and consequently candidates fail to grasp the true level or remuneration. Finally, we reasoned that historically high levels of venture capital funding have left would-be start-up joiners with a false impression of how well funded the industry is as a whole, leading to overstated salary expectations in line with consultancy’s offerings.

What are we seeing?

As shown below, the demands made of start-ups (at 14% and just under 10% over the offered base compensation) are significantly ahead of the mean value of 5% from across all of the studied applications. There is also a dramatic difference between ‘growth stage’ start-ups and those in the early stages, with the latter having to contend with a salary to expected salary disparity 50% greater than that faced by more developed start-ups.

percent applicants request overt the advertised salary

Eyes bigger than (VC’s) stomachs?

So then, why might this be? Why are people systematically hoping for more than is on offer, even though employers now advertise their positions’ salary to would be applicants?

Firstly, because start-ups are fun and tick lots of the boxes we have in terms of achieving job satisfaction, such as real control of outcome or P/L responsibility and significantly improved work-life balance. As such, they attract more applicants and can pay less. In banks and consultancies, the long hours and hard work have to be compensated further because these non-monetary benefits are not available.

It is also true that there is a perception of wealthy start-ups able to pay in line with consultancy salaries, no doubt linked to the constant stream of news about big money venture capital acquisitions and funding rounds. If you think you’re a strong candidate and that a potential employer can pay more suddenly expressing high expectations doesn’t seem like such a bold move.

Additionally, start-ups offer longer term reward and, as discussed earlier, equity is hard to factor in. However, if you’re given 1% or even 0.1% of a business at an early stage (seed or series A) that becomes quite a large part of your annual salary if a start-up can achieve hyper growth. 0.1% of a $100m business gives your share a value of $100k, which isn’t so bad.

Growing pains: why do early stage start-ups particularly struggle?

As for the stark difference that exists between early and growth stage start-ups, we reason that both struggle against the issue of perception but the early stage incarnations meet greater constraints and so are simply unable to pay as much as their more established counterparts.

In the earlier bootstrap stage, the generalist skill set isn’t valued as highly as start-ups are looking to bring in people with functional expertise who can solve problems that the founders have no experience in and have a big effect on the bottom line.

Finally, the disparity between the two could be a reflection of risk. Consultants are famed for how brand aware they are and early stage start-ups are yet to have a noteworthy reputation. It makes sense then for applicants to ask for more compensation to reflect the fact that the start-up may not achieve its growth ambitions and they will have invested time without earning the mark of a top company on their CV.

What does this mean for consultants?

Fundamentally, consultants need to think about the 5-10 year picture when assessing start-up pay. The first year salary is typically a very poor indicator of compensation. We suggest doing the following:

  • Understand the business. Is this going to be a success? Do you believe in the product? What do you think the potential growth of the business is?
  • Are they offering equity? It’s fine to take a lower salary if you’re going to share in the upside. Get your excel out and model what this equity would mean based on your projections above.
  • What is the progression like? You’re going to need to prove yourself outside of consulting but when you have, is there somewhere logical you can move to? Will this be recognised in other companies if it does all go wrong?
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