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?