Here's How Much of Your Startup Revenue You Should Use for Salaries

Although these data are rarely public, they can be inferred from financial reports.

For instance, MTN Group's 2022 financial report revealed that 6.1% of its revenue went to compensation. Specifically, out of 207 billion Rand ($12.1 billion)* in revenue, 12.7 billion Rand ($746.8 million)* went into staff costs. (Note: This includes salaries and wages, post-employment benefits, share options granted to directors and employees, training, and other costs).

Even though the report didn't reflect the staff strength during the period under consideration, it's worth noting that MTN Group has 19,295 employees as of October 2023, according to its profile on Forbes.

It is safe that the insights in this article specifically aim to guide decision-makers in startups and small businesses, where salary budgeting often feels like walking a tightrope. It is important to note that balancing competitive salaries with financial stability is a complex task with broader economic implications.

Chioma Daniel, Head of Finance at TalentQL/AltSchool Africa, provides valuable insights for navigating this challenge.

"It’s best to look at budget allocation for salaries from the angle of the value that the employees are adding rather than concentrating on the percentage to be allocated."

The 'Sweet Spot' between competitive salaries and financial sustainability 

HR managers and business leaders often face the challenge of defining expectations for each employee -- either new hires or existing staff. The goal is to determine the value each staff member adds to the company relative to the resources spent on them. The finance expert suggests viewing employees as investments that should yield optimal ROIs. To facilitate this decision, employers can consider industry salary trends and conduct regular compensation reviews to ensure that workers are not grossly underpaid or overpaid.

Depending on the company's needs and desired pace of implementation, employers can opt for a large team of less-experienced employees, such as interns, who command lower salaries. This team can be managed by a few highly experienced individuals. Alternatively, if the company can't compromise on experience, non-monetary compensation options like remote work can supplement salaries. However, Chioma emphasises that it's not just about the numbers.

"Teams often think that hiring more people will solve all their problems. This isn't always true, as redundancy can set in with a bloated workforce. Each team must understand that every new hire brings additional costs, such as taxes, pensions, and health insurance, beyond their net salaries," she explains.

How to approach salary budgeting effectively 

Salary structuring 

The Ex-PwC Senior Associate notes that several factors influence salary structure, including the industry, employees' experience, and qualifications. With a clear-cut salary structure, budgeting is largely simplified. This helps define the amount of work that is needed to be done at every level as well as the expertise needed to do the work.

With that, you're able to determine what is ideal, for instance, for an entry-level in that position, and what their salary progression would be over the next couple of months. This helps in projecting the investment needed for each employee over a fiscal year which can be placed side-by-side with the capacity of the company.

Strategic salary budgeting 

With experience in consulting, Chioma stresses that salary budgeting requires thoughtful planning. "Good planning yields positive outcomes both now and in the future," she says. What does this entail?

• Receiving hiring needs from all departments well in advance helps heads of departments align with their talent needs. Off-cycle hiring for key roles is minimised, except the situation is beyond anyone’s control. But it wouldn't be due to improper planning. Besides, in many such cases, a contract or substitute staff would be hired to cover that period instead of a full-time staff.
• Knowing the hiring needs allows the business to budget accurately for salaries and other employee-related expenses.
• Beyond budgeting, regular tracking of all expenses against the budget and available cash flow prevents financial strain.

Data and analytics 

Using data to determine salaries helps manage expectations on both sides. Implementing performance management processes ensures that employees are adding value. she advises conducting a cost-benefit analysis before any hiring decision.

"Be true to yourself (check your books) as you determine what the business can afford to pay. It is better to be consistent than to render your employees jobless after some time because you have run out of cash," she warns.

Discipline, flexibility, and adaptability 

Emphasising the importance of discipline and flexibility in salary budgeting, Chioma hints at having trusted business partners at the helm of budgeting. CEOs may not always be the best people to determine salaries, especially considering economic conditions and market dynamics.

Recent allegations against some African startup founders, like Prince Boakye Boampong of Dash, highlight the risks of poor fund management. In addition, critical steps should be taken when needed especially when market forces aren't favouring the company's survival.

African investors say reports of founder misconduct could hurt future fundraising efforts

"Be creative in coming up with compensation/perks. Where promotions come with salary increases, they should be backed up with data about the employee’s performance. Company-wide salary reviews should also be backed up with data about inflation, cost of living, industry average salaries for each role etc.," she adds.

Salary budgeting is more than just crunching numbers; it's a strategic decision with far-reaching implications. Chioma's insights provide a roadmap for achieving the delicate balance between offering competitive salaries and maintaining financial stability. Businesses can navigate this complex landscape by focusing on value addition, exercising discipline in fund management, and adapting to economic changes. It's a challenging task, but with the right approach, it's entirely achievable.

* - Conversion rate as of December 2022