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It's no secret that great talent is hard to come by, and that everyone is looking to build a team of high performers. But how do you decide what to pay them? If you're googling and guessing, or trying to snag reports off of your founder friends and investors, you're not alone.
Compensation is difficult by nature. It's not just about keeping up with the Joneses (when the Joneses are Zuckerberg and Bezos) or updating a chart once a year. It connects to the very essence of who you are as a company: your story, your goals, your values, and how you attract and enable your talent. Building out strategic compensation is often overlooked when the team is in hyper-growth mode, but your compensation strategy (or lack thereof) tells your team exactly how much you value them, and what you care about as a leader. Pay impacts your ability to recruit and retain, making it a critical piece of your business strategy.
There's also a lot of discussion of equitable pay in the workplace. Marginalized and underrepresented folks are often compensated unfairly for a variety of ingrained, systemic reasons. The best way to address pay inequality is to have a rock-solid, fair and repeatable process that takes subjectivity out of the game. If your company values diversity, equity, and inclusion, having a sound compensation strategy is a tangible goal that will move the needle towards progress. Here's how to do it.
This guide is primarily for those who are in a position to design and determine pay but could also be a fun look behind the scenes for anyone interested in how pay works. Ready to make it rain?
*Please note that compensation can be extremely complex, and have a number of compliance factors based on your location. This is just a high level guide to get you started, and does not constitute legal (or any other formal) advice.
Step 1: Get Philosophical
At the risk of sounding like some guy you met in yoga class, it's important to start with why and what before building out how. Compensation is a tool you can use to incentivize and reward specific behaviours, but you have to know which ones you're going for. Just like in yoga, self awareness is key!
- A win-at-all-costs sales team with an Always Be Closing mentality might want to incentivize competitive behaviour and use a lot of commissions and top individual performer rewards.
- A group thats to incentivize teamwork may want to lean on overall group performance or team bonus objectives.
- A company that values transparency might explore transparent salaries.
What behaviour do you want to reward at your company? There's no right or wrong: it should reflect your culture and goals.
Step 2: Think beyond base salary
The words "total compensation" might make your eyes glaze over, but in simple terms, it refers to all the ways a company can invest in someone including, but not limited to, their salary. Think of total compensation as the how in rewarding your people for the above behaviours. Total compensation includes your:
- Base Salary
- Equity (like stock options, or shares, if you offer those)
- Variable Compensation (bonus, commissions, things like that)
- Perks (non-cash incentives, like free lunches or therapy)
It's important to get clear on every part of total compensation before we get into research. Is it important to you that your team has top of the line perks? Do you have a workforce that expects commissions? Are you an early stage startup hoping to offer a ton of equity in exchange for slightly lower pay? We'll develop your formula in a later step, but it's good to start with a general idea.
Step 3: Research market data
Our first 2 steps identify what we want to do. In this step, we aim to answer if we can actually do it. Many teams want to pay their people at the top of the market and give their teams fabulous perks, but it would be a business risk if we didn't consider cash flow and budget. This is where a bit of research and validation comes in.
You'll want to start by gathering industry data* for your roles and find the market percentile. You should be looking for data to define, for each role:
- What salaries are lagging (below 45th percentile)?
- What salaries are at-market?
- What salaries are leading (60th percentile +)?
Which percentile should your company be in? It depends on your budget, how competitive you need to be, and the mix of non-salary compensation you are offering, like equity or perks. Again, this is based on what you value and the behaviours you want to incentivize.
- Company A is established, with lots of budget to work with and a very aggressive hiring plan. However, they can't offer as much equity upside as they're already over 500 employees. They may want to choose a higher salary percentile.
- Company B is pre-seed, with less budget, at least right now. They might choose at-market salaries, or even lagging, if balanced with high equity.
*You can use sites like Glassdoor, LinkedIn Salary, Neuvoo or Payscale to get free info, or use one of the many guides that various firms publish annually. You can also work with an external firm, like Bright + Early, to create something custom. Call us!
Step 4: Get clear on Non-Salary Compensation
Equity and Options
Note: We're talking stock options here, not "equality of all" type equity. Startup people, read on. If your organization won't be offering this, feel free to skip ahead.
Despite the many helpful guides out there, there's isn't really a standard on how much equity to offer, since so much depends on your cap table and pool size. Generally, companies will offer more equity rewards to their earlier employees. As the business matures, the company should adjust equity in relation to risk. Here are a few points to consider when developing your equity framework:
- How do you want to balance your cash and equity? If offering a lower salary, will you offer a higher amount of equity? Vice versa?
- Will every person in every role get equity?
- Are you granting more equity based on hire #, or role, or both?
- What is your vesting schedule?
- What is your stance on refresher grants? How often will you refresh?
- What is the value of your equity? How are you communicating that value in reference to compensation?
Variable Compensation: Bonuses and Commissions
We strongly recommend our "early-to-just-post-Series-A" startup clients not offer a defined bonus plan for most employees. Sounds controversial, but hear us out: When you're an early-stage company, your revenue is unpredictable and your goals are changing on a regular basis. This is normal. However, bonus plans rely on clearly defined goals and predictability and will incentivize behaviour towards those. Tying a bonus plan to these goals will leave your employees feeling frustrated because your company won't be able to hit these targets in a predictable way. Spot (one-off) bonuses, on the other hand, are a great way to reward milestone achievements at the company, without setting expectations or tying yourself to a goal that may change. Think icing on the cake; the cake is already great but the icing is a sweet surprise!
And what about commissions? If you've got a sales org, it's hard to build compensation without them, as experienced sales pros would be hard pressed to accept an offer without it. We're not deep diving into commission today, but This article by Xactly corp. offers a great guide to building out your sales team's incentive structure.
The value of perks are often overlooked or dismissed as fluff, but it's a great tool to showcase to your employees (and prospective employees) what you value.
- If you value inclusion, your perks could include a parental and pregnancy leave policy & top-up plan, additional days off for cultural celebrations, and flexible working hours to accommodate caregiving responsibilities.
- If your company values continuous learning, a professional development budget should be allocated and actively used to help employees level up in their skills.
- If your company values mental health & wellbeing, your perks should include additional coverage for mental health and resources to help managers keep track of potential burnout.
- If your company thinks taking time off is important, you should have a flexible leave policy and a culture that actually allows people to take time off.
Health benefits are also a must, and you should choose a package that best aligns with where you sit in the market salary-wise (at market, above market) as an absolute minimum.
Step 5: Package it into a formula and bands
Your Formula = Salary bands (based on the market percentile you've chosen) + equity bands + bonuses and perks.
To begin, grab your research and any career levels you have mapped out for your roles. If you don't have career levels, you can start with the basics: Junior, Intermediate, Senior.
From this, you'll create bands for each position at your company, for both salary and equity. To allow for growth and flexibility within the bands, they should not be a flat rate, but a range of 5-10 percentile points. For example, if a company wants to be around the 50th percentile, their band might range from the 45th-55th.
Now that you have a formula, bands (and a solid rationale behind it) you no longer have to negotiate what works (and doesn't work) for your company.
Step 6: Connect it to your other people processes
Let's say that you followed the steps above and you're ready to use your new compensation strategy. However, you're unsure about how to actually deploy this. Where do people fit in the bands, and how do they move up?
Ideally, you'll need guides to each career level for each of your common roles (i.e. junior, intermediate, senior), with clear expectations of what each looks like and that evaluates job aptitude, culture alignment, and potential for each of the levels. Then you can tie these to the compensation bands. Use your performance management system to track progress on goals and progression through those levels.
As you roll these out, you may have to adjust some salaries that are below the bands you chose. Since you cannot decrease someone's salary, if some are currently higher than your new band, you can reevaluate the bands or simply use them as a go-forward guide for new hires.
Step 7: Write your compensation philosophy
Now that we have all this great data and intention on hand, we need to make it work for us. I believe that in order to set your strategy up to scale, you need to centre it around what we call a compensation philosophy.
A compensation philosophy is a statement that highlights:
- What behaviours you will incentivize and reward and how;
- What you are committing to regarding your compensation;
- What your total compensation package is comprised of;
- Where the company is in terms of market rate (lagging, at-market, leading);
- The formula used for pay adjustments;
- The cadence of raises and salary data audits
Your compensation philosophy helps guide managers through hiring and career conversations, helps recruiters sell the company. Most importantly, it lets employees know, loud and clear, what you value and how you're taking care of them.
Step 8: Communicate
You could have the most sophisticated compensation philosophy in the world, but it won't be as effective if your team doesn't know about it. Consider dedicating a page in your employee handbook or wiki to compensation, sharing your general philosophy, any key dates, and any other pay information that you've decided to share.
Step 9: Audit
Generally, you want to set time to audit your market rates at least once a year. Things change quickly, and you don't want to get caught suddenly paying far below market rate when that wasn't your intention. Auditing is also critical to equitable pay. Look out for patterns when you can. If you have information on your team's gender makeup or other identity factors, is one group disproportionately at the low or high end of the band? Does the reasoning hold up against your process and philosophy?
When you discover that your data needs an update, be it based on market values, performance, or equitable pay, be quick about adjusting salaries. We've heard too many stories of star employees leaving for higher compensation without even asking for a raise. Don't let it happen to you- be proactive. Remember: a company that values its employees is one that will inspire truly great work from them.
Team Bright + Early
Steal Me — A Sample Compensation Philosophy
Our example company, MerryGoRound, is a startup disrupting the ice cream space. MerryGoRound does not have a lot of money to pay top percentile salaries, but they are strongly values-driven and have early equity they can leverage. This is just a sample format and should not be construed as advice.
Our mission at MerryGoRound is to disruptively delight customers, bringing a sense of fun and whimsy to their day. This mission drives our delight-centric culture, where we aim to bring joy to not just our users but our employees. We believe that as a company, we have the responsibility to ensure our employees are heard, supported, and taken care of, so we invest into our employees through benefits, perks and continuous learning initiatives. We aim to attract and reward employees who will champion our values, so our compensation strategy will focus on them.
At MerryGoRound, we value:
- Fun, so we'll provide benefits like a rollercoaster allowance, weekly cotton candy delivery, and unlimited sprinkles. We'll reward employees who delight customers and teammates in unexpected ways.
- Teamwork, so we don't pay commissions. All bonuses will be based on company goals and objectives. We will also leverage stock options and equity so that we all win together.
- Personal Care and Growth, so we offer an extensive professional development budget, top of the line health benefits and 4 weeks of annual vacation.
- Customer Obsession, so we will factor NPS into our company and team goals.
- Transparency, as we believe that transparent compensation decreases bias, confusion, and distraction. MerryGoRound's general salary bands will be included in job postings and in our handbook, but individual salaries will remain private.
How these values connect to each role is reflected in our career guides, which are aligned to our pay bands.
Total Compensation at MerryGoRound
MerryGoRound will pay at-market (50th percentile), benchmarked against Series A companies in Canada. Team members currently below this range will have their salary adjusted to reflect the market rate. We will also leverage equity and stock options in the same percentile range.
MerryGoRound's total compensation package will include:
- A base salary that is set by level; salary increases will occur on a twice annual basis based on performance and market changes
- Equity that is standardized based on level; equity will be given upon joining the company, and vest on a 4 year schedule with a 1 year cliff.
- Benefits and perks that reflect our values (see above)
Raises: In general, raises will not be rolled out universally, but on an individual basis if performance has exceeded expectations (outlined in our career levels) and/or a title promotion has been granted.
Bonuses: Bonuses may be triggered if the company hits a specific milestone, where bonuses are aligned based on the impact of the role towards achieving the milestone.
Hiring: All new hires must be offered compensation that aligns with our philosophy. Unfortunately, we are unable to make exceptions or negotiate outside of our set salary and equity bands. Our salary bands are aligned with our job levels and we conduct annual market audits to ensure our salary is competitive in relation to the market.
Audit: MerryGoRound will audit market rates on an annual basis and make market adjustments as required, which are independent of performance based raises.
Want to dive in deeper? Bright + Early offers compensation research, strategy, and philosophy development for companies from 10-500. Give us a shout at email@example.com to get started.