No negotiated salaries or negotiated pay rises at Mäd, everyone in the same role at the same level is paid the same, and salary goes up according to the salary scale as you grow into a new role. So if your managers and team members believe that you are 10% of the way to the next level in the salary scale, you’ll receive a salary adjustment of 10% towards the new level.
The idea is to minimize company politics, and ensure that we are rewarding individuals based on performance, not on their ability to pitch themselves and their work to management. See this link for more details on this idea: https://a16z.com/2010/08/24/how-to-minimize-politics-in-your-company/
It also goes without saying that a higher salary comes an expectation of greater responsibility and value creation.
- 1.What the company can afford to pay.
- 2.Your Individual Performance:
- 1.Performance in projects.
- 2.Training and helping other team members
- 3.Initiative on subjects or areas that are not your direct responsibilities
- 4.Following (and contributing!) to our SOPs.
- 5.How long you've been at Mäd. Note that while we consider this, it's a small part of what we consider, likely 5%-10%.
Let's look at these two main points.
Let's do a quick Finance 101.
We have sales (also called our "Top Line", because that's the top line in our financial statements) that come from the services that we render to our clients. Some, actually most, of these billings are recurring in nature, clients pay us every month for services that we do for them on an ongoing basis.
Next up, we calculate what is called our "Gross Profit", this is all of our sales, minus any expenses that we have that are directly related to doing the work that the clients pay us for. This is called COGS or "Cost of Goods Sold". In our case, this is mostly all the salaries of the project teams, and a small amount of software costs. So we would include the salary of a graphic designer or an engineer in this calculation, but not the salaries of the management team or administration team.
Next up, we need to calculate our "Net Profit", this is what the company actually makes as a profit at the end of each month/quarter/year.
We do this by taking the "Gross Profit" we calculated earlier, and then taking away any "Operational Costs". These are all costs related to running the business that were not included in the COGS calculation above. That's rent, internet, electricity, other software costs, legal fees, insurance, management and non-project staff salaries, and so on.
So the key question here is what should be the percentage split between all of these areas or line items?
So let's work backwards.
We aim for a 20%+ Net Profit.
This is enough to reinvest back into the business for growth, as well as providing enough incentive for current and future investors to invest further funds into Mäd if required.
With this in mind, we can see that a reasonable division of cost is the following. Let's take $100,000/month in sales as a starting base:
- Sales: $100,000
- COGS: $40,000 (40%)
- Gross Profit: $60,000 (60%)
- Operational Costs: $40,000 (40%)
- Net Profit: $20,000 (20%)
So, the company can pay approximately 40% of total sales into project salaries, and this is how we work out our yearly budgets. We need to calculate how many additional team members we are likely to hire, plus any increases we want to give to existing team members. Note that for sales, we tend to make this calculation based on our MRR (Monthly Recurring Revenue) instead of the one-off large sales we may have. This is because when we hire someone new or increase a salary, we are committing to the long-term, and if we base this on short term projects, things won't look so great in the future.
So, for the above example. If we have $100,000/month in revenue, but we find ourselves only paying out $35,000/month in salaries, the management team would know that they have $5,000/month worth of salary increases that they can hand out to deserving team members.
This is where there is a lot of grey area, but we have put a system in place to try and recognize great performance as quickly as possible, and reward it.
A compensation committee made up of team members from design, front-end engineering, back-end engineering, and management meet every three months to do an in-depth review of performance across everyone in the company and see if pay and performance are well-matched.
Our process for this is:
- 1.How much budget do we have right now for salary increases?
- 2.Which team members should receive an increase?
- 3.How do we split our budget between the team members?
Point 1 is quite easy to solve, we just make the calculation that was explained above.
For point 2, we look at the relative performance in the company, and look for examples of where team members have performed above their current pay grade. Has a junior been working independently on a project and received rave reviews from a client? Perhaps they are edging towards mid-level performance and their compensation should be matched.
Or perhaps one of our team leads has started to take a much more active role as a full leader in our company, and so on...
For point 3, splitting our budget across the team members, this will be done with the following in mind:
- Historical increases to that particular team member and other team members
- Following current market rates. Mäd aims to pay at the top of the local market, and we believe that we consistently do this.
- Can we offer spot bonuses to certain team members instead of salary increases?
We believe this is the fairest way to handle the sensitive topic of salary increases which makes sense both at a company-level - i.e. ensuring that we don't pay too much and become uncompetitive or go bankrupt, and also at the individual level, where we pay equal performance equally, and do not rely on the individual's ability to negotiate as the primary driver of salary increases.