Startups allocate 68% of revenue to employee compensation: Report

The growth-stage startups in the country allocate an average of 68 percent of their revenue to employee compensation, comprising cash, according to a report by scaling platform xto10x. Neeraj Aggarwal, Co-founder and Chief Operating Officer at xto10x, said that compensation and payroll spending are among the two significant things to get right for start-ups, apart from the focus on profitability.

Compensation models evolve with startup maturity. Early-stage start-ups favor commission-based incentives, while late-stage companies integrate performance-linked incentive plans with Annual Operating Plans (AOPs) to drive sustained business growth.

To address the issue of ownership dilution during fundraising rounds, many startups, in collaboration with their boards, adopt Management Stock Option Plans (MSOPs), ensuing equitable founder ownership.

In late-stage startups, the ratio of Stock-Based Compensation (SBC) to Market Capitalization is a key guardrail in designing ESOPs and founder MSOPs. This ratio typically ranges from 0.5% to 1% (or slightly higher), ensuring that founder equity remains proportional to company valuation. Some of the mechanics of MSOP grants are Gift Equity (Direct equity transfer from co-founders or investors); Time-linked grants, performance-based grants, and IPO-based grants, respectively. 

"As startups keep scaling and growing, the compensation strategy changes for leaders, as well as, overall organisation. An early-stage compensation is lesser compared to late-stage in terms of quantum. The early stage compensations are grants to lure the employees in which performance role is negligible. However, as the company grows, the founders, then use performance-linked incentives, cash payouts, bonus payouts, etc. In the later stages of a company, founders don't receive a large percentage of equity because even a small grant of, let's say, 0.1% can mean a lot to people in terms of the absolute amount that it translates into for senior leaders," Arun Vigneswaran, Head - People Excellence at xto10x told Storyboartd18.

Leadership pay is increasingly structured to reward business impact. It increases by 20-30 percent at each stage of startup growth, as early-stage firms operate with lean teams, while growth-stage and late-stage companies attract more seasoned executives. 

Non-business functions like HR, Finance, and Engineering typically receive around 15 percent variable pay, while marketing and growth leaders see variable pay ranging from 25-50 percent, with sales leaders most commonly at 50 percent.

According to the report, the fixed pay of CXOs, VPs, and Function Heads, typically ranges from Rs 80 lakh to Rs 1.7 crore, with tech leaders in Engineering, Product, and Data Science earning above the median, it added.

In contrast, leaders in core operating or business-critical functions are paid market-leading compensation. For instance, Marketing leaders in D2C or consumer brands and tech leaders in Fintech and deep-tech startups often earn in the top 75th-90th percentile of market benchmarks.

Unlike traditional enterprise CEOs, startup founders rely heavily on equity for wealth creation. In over $1 billion startups, CXO roles often follow a multiplier-based approach, with a median multiplier of 1.2 fold. For instance, a leader earning Rs 4 crore in salary over their tenure might receive Rs 4.8 crore in equity. This multiplier varies based on market cap, industry, etc. Citing example, the report noted that the median multiplier becomes four-fold at a valuation of $5 billion.