Note to readers: Hello world is a program developers run to check if a newly installed programming language is working alright. Startups and tech companies are continuously launching new software to run the real world. This column will attempt to be the "Hello World" for the real world.
About 10 million fellow Indians have lost their jobs in the past few weeks, and nearly every household has suffered declining income since the pandemic began last year. These are mostly young people. Meanwhile, in startup land, there is much brouhaha about founder and executive salaries.
The question of founder salaries in private companies has always been a tricky one. Some founders don’t take any salary at all. Some founders take a lower than market salary in the beginning. In most cases, it depends on the circumstances under which the founders and the company are.
For example, if you’re bootstrapping a company and don’t have significant profits, you have no choice but to pay yourself less. If you’re an adequately funded company and are yet to make profits, my advice in the past to founders has been to take a median market salary so that you’re not worried about meeting expenses and are focused on company building.
Several funded companies also create liquidity events for founders as they raise bigger rounds so that the founder’s risks are rewarded.
Executive salaries in public companies often make news because they have public shareholders, and salaries are linked to the company’s stock performance. This is done with the assumption that the company has a stable business model and is able to grow into the future.
Management guru Clay Christensen explains that the salary debate has its origins in the '70s, when economists Michael Jensen and William Meckling published the incentive theory which said that people put in work that’s commensurate with their pay. And so financial rewards became an important lever to align executive incentives with shareholder interests.
But the theory was contested by American psychologist Frederick Herzberg, who published the two-factor theory, also known as motivation theory. According to Herzberg, compensation is not what truly motivates people to love what they’re doing. Compensation is a hygiene factor and contributes very little to job satisfaction after a point. And that’s why you have several highly paid executives—lawyers, bankers, and chief executives—who are severely unhappy.
According to Herzberg, you will love your job even if you are not making a lot of money if you get your motivators right. Christensen explains that motivators are usually answers to questions like: Is the work meaningful to me? Is the job going to give me a chance to develop? Am I learning new things? Will I have the opportunity for recognition and achievement? Am I going to be given responsibility? This is why you have several really smart and hardworking people working in public service or nonprofits.
Nearly all the time, startup founders get their motivators right. They do it because they want to do it. Because they could be doing a dozen other well-paying jobs but they choose to startup. They did not do it for the fat pay in the first place. And this is why the debate about founder salary at (privately held) startups is rather irrelevant. It is for the founders and their board to decide.
Entrepreneurs are a rare breed. Successful entrepreneurs are even rarer. They create companies, jobs and pay taxes. And that’s why instead of focusing the debate on antiquated theories of incentives, the debate must be about what it will take to help them succeed.Also read: Zerodha founders’ salary: Let’s cut through the noise