Wealthsimple Work: Paying Startup Employees

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Katherine Gustafson is an author and personal finance expert from Portland, Oregon. She writes about investing for Wealthsimple as well as having written for Forbes, Business Insider, TechCrunch, and LendingTree. Katherine is a past recipient of the Izzy Award for outstanding achievement in independent media. She has a BA from Amherst College and an MA from Boston University.

Q: “I run a creative, non-tech startup business. How do I pay myself? And how do I balance planning for a life of entrepreneurship with also wanting to do right by my employees? I’d also love to know what I should be considering when it comes to their compensation, payments, methods, and fairness (salaries, dividends, retirement contributions – all that good stuff!).” — Stuart T.

A: Congrats on even asking these questions! It shows that you have a sense of responsibility for the financial wellbeing of your employees. That is the right place from which to start any conversation about compensation and related questions.

There’s a lot to say about this topic—your own and your employees’ compensation has many parts, and you need to think through each carefully. Let’s start with your first question, “How do I pay myself?”, and then discuss how you can make sure your team is well-supported.

How to pay yourself

You have two options here: Pay yourself a salary, or pay yourself dividends. Actually, you might want to do both!

We recommend paying yourself a salary that is sufficient to meet your lifestyle needs, but not far above what you need so you can keep your individual tax rate low. You can take any additional income from dividends, which are subject to the corporate tax rate. This structure helps you save on taxes, since the corporate tax rate is lower than the individual tax rate for higher tax brackets.

Along with paying yourself a salary, you should contribute to government benefits such as employment insurance and the Canada Pension Plan. This will enable you to access things you might need down the road, such as parental leave, which requires a proof of salary.

You can participate in whatever Group RRSP you’ve set up for your employees. Create RRSP contribution room by documenting your earned income with the CRA. Some entrepreneurs aim to document around $150,000 in earned income to max out their RRSP room.

How to pay your employees

Compensation is one of the best ways to attract and retain employees. Providing good pay makes employees feel valued, helps them reduce financial stress, and removes distractions that prevent them from doing their best work.

If your company is a startup, remember that employees take a risk when accepting a role with a new company, and good compensation can help them feel more comfortable with the risk. Along with providing generous support, one way to reassure them is to structure your compensation in a fair and transparent manner.

As much as good, well-structured compensation matters, it’s good to remember the words of Molly Graham, former manager of culture and employment branding at Facebook: “Compensation is never going to be the thing that makes people join or stay at a startup long-term (or any company), nor should it be.” Ideally, your people should be joining you for the people, culture, and vision, and then working to get excellent compensation as part of that deal.

Main components of compensation

Base pay

The base salary is the foundation of your compensation package; it’s not something you should manage haphazardly. It’s important to create a standard package and a structured scale that can guide you in assigning salaries and offering raises. Two important rules to follow: Keep it simple, and treat everyone equally when it comes to establishing pay.

Health and welfare benefits

Offer your employees high-quality health benefits, including supplemental medical, prescription, dental, and vision coverage. When shopping for a plan to cover your people, keep in mind that mental health benefits are especially important right now. You might also want to look for a plan that incorporates a health spending account to help employees with additional health-related costs that insurance doesn’t cover.

Another thing that employees appreciate are welfare benefits such as life insurance, accidental death and dismemberment insurance, and long-term and short-term disability insurance. An employee assistance program can also benefit employees and make them feel supported and valued.

Retirement package

Another major element of compensation employees will be looking out for is a pension plan. According to a survey by Abacus Data, 70% of Canadians would be willing to take a lower salary in exchange for having a workplace pension plan. And in general, employees have been found to be 15x more likely to save for retirement if their employer offers retirement savings vehicles.

“A secure retirement remains of greater concern for Canadians than concerns about their health, debt load, and job security,” reports Benefits Canada. “Nearly 48% of respondents said they’re very concerned about having enough money in retirement.”

Offering a Group RRSP is a good way for Canadian employers to go. Wealthsimple for Work is an example of such a plan that is easy to set up and simple for your employees to use.

When searching for a plan, look out for two red flags that can hinder your employees’ experience of retirement saving: High management fees and confusing fund selection. Many GRSP providers will charge 2-3% for their services, while you can find plans with far lower fees. Wealthsimple for Work, for example, charges fees of only 0.4%-0.5%. A confusing fund selection process can make it hard for employees to choose the right set-up for their risk level and timelines. Again, Wealthsimple for Work does this well; the simplicity of fund selection is one of the plan’s major benefits.

After finding the right GRSP for you, we recommend setting up an employer match to boost your employees’ enrollment rates and savings levels. It’s standard to match between 3% and 5% of your employees’ pay, but this decision should be based on what you can afford.

Resource: See GRSP ebook

Stock options

Publicly traded companies may choose to offer employees stock options as part of their compensation. Although they shouldn’t be considered a sufficient replacement for retirement funds stock options can be an effective way to empower your employees to do their best, since those who own a piece of the company have some skin in the game. That feedback loop also means that stock options may encourage employee loyalty and longevity. Offering stock options can benefit you as the employer by boosting your employees’ benefit packages while maintaining cash-in-hand to use to grow your business.

The importance of company culture

The culture you establish for your startup from the start will carry on over time, so it’s important to create one that will support and satisfy employees. Center your company culture on caring for your employees while being systemic and transparent in how you organize compensation.

A study by Walden University’s Dr. Tom Cavanagh shows the power of creating a “culture of care” in schools and workplaces; it encourages developing individual relationships so that each person in the institution can feel understood and supported.

“A Culture of Care is a theory that says schools and workplaces should put more importance on relationships than curriculum when determining their institutional purpose,” says Dr. Cavanagh.

For workplaces, that means that how you treat and value your employees — and work with them as individuals to help them meet their needs and goals — will be one of your most important competitive advantages.

Last Updated November 1, 2021

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