Dear SaaStr: Do Salary Increases Help With Retention?

Dear SaaStr: Do Salary Increases Help With Retention?

I’ll defer to those with more data than me, but here’s what I’ve learned across 3 startups of my own, and investing in 25+ more, including 6 unicorns and decacorns::

  • Underpaying certainly leads to departures. Employees that are underpaid get bitter and leave. Don’t let it go. Review salaries quarterly, not just annually. And especially, don’t take advantage of those that do well but don’t complain. Eventually, they’ll leave if they don’t feel treated fairly.
  • Top sales reps that are paid “top of market” stay longer.  This doesn’t mean salary increases, though, per se.  It means that the top 25% or so of reps are well paid vs. the amount they close.  It means architecting a plan so that the top reps make a lot — for closing a lot.  Sales reps all talk to each other and quickly learn which startups “pay” the most, but many of them really pay for performance in sales.  They just pay well for it.
  • But moderate overpaying in general does not appear to create any stronger retention. Folks seem to just acclimate to it.
  • Year-end and time-based bonuses lead to some retention, but maybe not the right kind. Sales folks in particular will stay until a big bonus check. But I’ve found non-sales folks will leave even days before a bonus and don’t care as much.  Either way, time-based bonuses work a little, but maybe aren’t worth over-investing in.
  • Massive overpaying increases retention of the so-so and mediocre. They don’t leave at BigCos when they are paid 2x or more what they could get elsewhere.
  • Promotions do help with retention, but aren’t always magic outside of top performers.  The best employees often deeply appreciate promotions and rise to the occasion.  You get a huge lift promoting your best team mmebers.  But merely “good’ employees often still quit after a promotion.  They often want the title and comp, but not the work.  But you gotta try.
  • Stock option vesting schedules do increase retention, but sometimes in unpredictable ways. Employees will quit on their 1-year vesting date in many cases if they aren’t bonded to the opportunity. A modest benefit to the company here. They’ll also leave as they become 100% vested, even if staying makes a lot more sense given the potential outcome. Folks just don’t act totally rationally around vesting schedules. They don’t fully get it.  Evergreen options are a complex topic, but it’s worth trying.  But the problem becomes that the second and third grants are usually so much smaller than the first one (as the company’s valuation grows, they have to be), and so the employees often don’t value them and sometimes even look down on them as too small to be worth it.  But you gotta try.  Try to do subsequent grants at least for your top 20% that vesting over next 4+ year schedules, even if they don’t incent as much retention as you’d hope they would.

So IMHE at least spend a ton of time making sure folks are paid fairly. And — equally. Assume everyone else knows everyone else’s comp. And get extra options and equity to those that move the needle.

But overpaying doesn’t seem to help much at all.  A bit of a mystery, that.

A bit more here:

By The Time You Give Them a Raise, They’re Already Out The Door

Published on November 22, 2021

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