The lean medical device startup compensation policy

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A great coder with a great idea can start an amazing web 2.0 business. In the web startup world, college dropouts create billion dollar businesses by their mid-20′s. In the medical device industry though, experience counts. You’ll need a VP Regulatory Affairs that has several FDA approvals in the last 10 years. Your head of product development should have driven several products successfully to market. Your head of marketing should be a creative product launch veteran. I hope your manufacturing team has built many medical device products before.

Ramen profitable” doesn’t work for medical device companies.  Medical device companies need experienced talent. Experienced talent deserves fair compensation.

What’s the right compensation policy?

Whether intentional or not, your first hire sets a precedent and policy. You need to address compensation issues early, including base salary, bonus, equity and title. (I include title because accepted salary ranges are tied to titles – CEO’s make more than technicians).

As a medical device entrepreneur myself, I want to hire superstars, who will move my project disproportionately faster. My compensation policy needs to attract top talent. I used to think that superstars would be attracted by an above-average base and bonus – I’d pay a little more, and get a lot more. I was wrong.

Here’s what I now believe is the right policy:

  • a base salary at (or even somewhat below) industry average,
  • zero bonus,
  • generous stock options (proportionately greater for early hires), and
  • a title that matches job responsibilities.

While standard in tech startups (Dan Shapiro said it well: “Startup pay kind of sucks”), this policy is not that common in medical devices. To understand why I think it’s right, first let me explain what kind of team I want to build:

I want team members who are motivated to build long term company value (and equity value).

I don’t want team members who “just want a good paying job.”

I want team members who find creative ways to do more with less, so we can raise less money and avoid equity dilution.

I don’t want team members who focus on the tasks for this year’s bonus, especially at the expense of long term value creation.

I want team members who believe so strongly in their own ability to deliver value that they are willing to sacrifice short term cash for long term equity appreciation.

I don’t want team members who view their employment as a time-clock-driven market transaction with an employer. (see Dan Ariely, Predictably Irrational page 80).

I want team members who are inspired by our opportunity and have a passion for our mission.

This leads me to a compensation policy with reduced short-term compensation (salary and bonus) and increased long-term compensation (equity). Fred Wilson, at Union Square Ventures writes, “In the startup world, the primary way that founders and the management teams they hire are compensated is via equity. And that is the very best way to compensate people who run businesses. It aligns the interests of the shareholders and the managers.” I’d extend this policy to all employees. We need to align the interests of our shareholders and our inside team, period.

Why a zero bonus?

How motivating is a bonus, really? My best employees have always worked hard to do what’s best for the company. They are internally driven to excel, to be part of a winning team. Their minds are not on the bonus payout.

Besides, a bonus plan has plenty of potential downsides.

First, an employee can be disappointed if company goals/bonus are not achieved and no bonus is paid, especially if he or she feels little control over the outcome. A positive motivator beforehand can become a negative after. This becomes more of an issue as the company gets bigger and you have more junior engineers. For that reason, individual contributors prefer bonuses tied to individual or department achievement, but it’s difficult to pay a bonus for a successful departmental milestone if the company milestone is missed.

Second, company goals can sometimes change, and employees can be disappointed if they feel the bar is being raised, or that they aren’t getting credit for working toward the original milestone.

Third, discretionary bonuses are inherently subjective. Objective milestones would solve the subjectivity problem, but are difficult to define a year in advance, when the company is moving rapidly. Subjectivity can also result in the appearance of favoritism.

Fourth, admit it – it’s a painful management task to determine fair bonus levels.

The HR consulting firm Fox Lawson writes, “The purpose of an annual bonus is to motivate short-term behavior. … About half of the start-up companies pay no bonuses at all, so don’t feel that you are obligated to pay a bonus. Remember that a bonus is just one arrow in your quiver. Don’t use it unless your target is clear.” For medical device startups, I see no clear target.

What about titles?

Titles matter. Titles should match job responsibilities, period. You do a real disservice to your company and your employees when they don’t.

I’ve seen companies give out manager and director titles to land senior engineers who can’t manage a project or a team. Given management responsibility, they screw up the project. Given an individual contributor role, the title upsets their peers, and creates an appearance of favoritism or mismanagement.

Overblown titles are ultimately a disservice to employees too. When these employees start looking for their next roles, they can’t compete with those who really performed the higher level job.

Inappropriate titles are a form of dishonesty between the employer and employee. Just don’t do it.

So there you have it: the right medical device startup compensation policy is equity-focused, cash-light, bonus-free and properly titled.  What’s your policy?

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10 thoughts on “The lean medical device startup compensation policy

  1. Great discussion, Jay. I am with you on most topics; bonus, equity, title. I disagree on salary though and here’s why: Salary is essentially a valuation of the team member you wish to bring on. Any All-Star Team you are seeking to assemble (and you will NEED to assemble an All-Star to move far forward fast) will require finding the best of the best, again, All-Stars. Also, all satrt-ups lack initial infrastructure as youa re building that with the assembly of this etam, so the All-Star that you need to hire must be beyond the typical VP, Director, Manager, Engineer, etc. that you would hire for a like positon at a more established company. Therefore, the value the All-Star brings to your team will be far above typical (many hats, mugh value), thus the valuation of that team member should be more, not less, than what you would hire if you were assembling a team at an established company.

    While I agree that keeping expenses low is especially crucial in a start-up environment, there should be a balance between recognizing and acknowledging the value of the team member you bring aboard and simply being cheap.

    As a sidenote, why underpay for what youa er consdiering the best-of-the-best? You made a comment about the motivation of a bonus. I 100% agree with this comment, but I take the same thought out a little more. Doesn’t the same disappointment follow through with each paycheck, knowing you are working 60-70 hours a week with the perception that you are actually valued less than lesser colleagues. I would recommend keeping the cash commensurate with the title’s actual value to you (so, cash-equal or cash-strong. What are talking – 10-20K anyway? Recruiting fees are treble that to continually refill positions) and going equity-heavy.

    The All-Star Team is going to make the company go, why lowball an important asset? (Not really a rhetorical question).

    1. Scott. Great points. Superstars make a company go faster. I don’t believe in lowballing a critical asset: I believe in paying generously in my most valuable currency – company equity. Lean startups offer an opportunity one can’t get at a big company – the chance for a meaningful equity position. I believe that lean medical device startups need superstars that are motivated by that opportunity, and aligned with founders and investors.

  2. Nice piece, Jay, and very good points. I’ve got to agree with Scott on the salary issue, though. Any All-Star with some experience at small companies will have likely gone through multiple times when they accepted equity and no bonus in lieu of better pay and got burned.

    All-Stars usually still have mortgages to pay and maybe their spouses want to put a deck on that home. Medical device start-ups are disproportionately in very high cost of living areas, and very few companies adjust their pay to fully account for the disparity. In the Boston area for example, pay seems to be about 10% to 15% above average for a cost of living that is more like 30% above average.

    So, if you are paying your All Stars at or below average, you are going to risk losing them when minor frustrations or setbacks occur. After all, you gave them a great title that commands a high salary somewhere else!

    I would advocate at least shooting a bit above average…

    1. Sean,
      Thanks for your note. You make a great point that salary averages are location dependent, and medical device companies are often in higher-cost-of-living locations, like the Boston-area or Silicon Valley. This should definitely be taken into account. We’ll have to agree to disagree on the salary issue though.
      - Jay

  3. Fair enough… :)

    I think we also don’t keep pace with the Bay Area. I think this has been true for a long time. Ten years ago, a science PhD right out of school in the Boston area commanded about the same salary as a Boston firefighter. And less than the average salary of a science teacher in the public schools. At that salary, the numbers worked out such that you couldn’t afford to buy a decent studio condo. Pay in the Bay Area for similar jobs was 50% higher.

    So, this article yesterday was no surprise to me:

    http://www.boston.com/business/technology/articles/2011/07/28/state_business_leaders_aim_to_replenish_pool_of_tech_workers/?page=2

    I would actually agree with the average salary point, but only above a certain threshold. I would concur that you don’t want an All Star who is already quite comfortable and will jump ship for an extra $10k out of greed.

    But I think it would be dangerous to toy in the intermediate salary regions. If you are in the range where families must have two salaries, or where you struggle to afford a 1,500 sf home in a decent community with good schools inside 95/128,… then plenty of rational people will jump ship for modest raises.

  4. Jay,

    At Acoustic Imaging we did not pay bonuses and every employee received stock options. Founders and early employees had low salaries and more equity. Stock options awards were commensurate with employee’s potential to make significant contributions. The key is the trust one places in the CEO, Directors, and Investors. If employees sense a win/win they will buy in.

    Dan

  5. I have a clarification question. When you suggest a Base Salary at ‘industry average’, what average is that? A recent industry survey suggested that for a VP of R&D at a company under $25MM the median is $205K Base, up to $149MM the median is $264K and at $500MM it is $369K. So when you say ‘industry average’ is that tied to size or an average of all of these?

    1. Good question. Industry average depends on company size and company location. It’s important to get to know a good executive search firm who can help you get real data, as most internet-based sources seem out-of-calibration to me. Compstudy.com is one of the best sources of data, if you can get accesss.

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