As pressure mounts to conserve cash, founders, investors and human resources experts told ET that many startups will hold back raises for senior staff this year.
At some companies, including those undergoing layoffs, top management may take pay cuts as well, they said.
At February-end, ecommerce firm Flipkart announced that it would be freezing increments for the top 30% employees, including senior leadership, as it sought to be prudent in managing resources amid tough macroeconomic conditions.
Edtech firm Unacademy, which has undertaken four rounds of layoffs, announced in its latest cost-cutting initiative that the leadership would take pay cuts up to 25%.
“The ecosystem is not making money; it’s a logical move. Companies will have to figure out how to manage costs; job cuts alone are not enough to control the burn rate,” said Anshuman Das, managing partner, Longhouse Consulting.
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About 20-30% of employees at many of these firms will not get hikes this year, a compensation consultant told ET.
“Cash flow is in question. Companies will do whatever it takes to conserve cash, especially after the huge hikes given during the boom in the sector in the last couple of years,” said the consultant, who did not wish to be identified.
Sandeep Murthy, partner at venture capital fund Lightbox Ventures, said downturns are a great time to build businesses as many companies look to “do more with less”.
This applies first and foremost to senior management, who are incentivised by long-term value creation in the business via ESOPs, he said.
When funding becomes tight, management reduces their cash pay to ensure that the company can weather the storm and come out on the other end alive and ideally stronger.
“We’ve lived through this cycle before and it is no surprise to me that this is happening now. In our portfolio many CEOs and other senior staff that are aligned with equity-based compensation have taken pay cuts and are working to create personal and company value through equity,” said Murthy.
He cited the example of Zeno Health, where the founders have not taken an increment and have deferred a portion of their cash compensation as they work to bring the business to profitability.
The CEO of another edtech firm, which has its appraisal cycle coming up, said it was unlikely that senior management would get hikes.
“We are being careful with costs and senior management will lead from the front,” said the chief executive.
While sectors such as edtech and crypto are the hardest-hit, even companies in a more stable position are actively pruning costs. The industry has been struggling with slowing funding, sinking valuations and thousands of layoffs.
The CEO of another startup said he is circumspect despite having recently raised funding. He too said a salary freeze is likely for senior executives, though a final decision is yet to be taken.
The startup has seen a slowing down in demand in the past few months and it’s important to conserve money, given there is no visibility on how long the slowdown will continue, he said.
“Last year’s hikes were extraordinary… they weren’t grounded in reality. This year, we need to be conservative with cash,” he said, speaking on condition of anonymity.