Structuring your company or team's compensation, especially in the early stages, requires thoughtfulness and foresight. There are a few things you can do to help create a framework for compensation that helps you attract talent, compensate your employees equitably, and bolster employee retention.
We've compiled some resources and tips below:
Create a "Compensation Philosophy" and communicate it actively
A compensation philosophy helps you articulate how employee pay — cash, equity, benefits and perks — is structured and the reasoning behind it. An example might be "we pay at the 50th percentile salary and equity for companies at our stage, and invest heavily in a fully competitive benefits package."
Communicating this philosophy is an active practice, and should start before a new hire walks in the door, so to speak: you should use the philosophy to build a hiring plan, to describe your culture, and as part of your offer. This helps you with your recruiting efforts because it helps protect your and candidates' time and prevents a situation where you get to the offer stage and find expectations are completely misaligned.
Consider a few factors when formalizing your compensation philosophy:
Company size, stage, location —
You likely won't be benchmarking against companies that are 10x your size or are nearing an exit if you're at the seed stages. If your expectation is that talent work in high cost of living areas, then your compensation should be competitive for that market.
Growth opportunities —
If you anticipate employees being able to grow into leadership roles or across a larger surface area because your company is growing quickly, you might consider making this part of your compensation philosophy - i.e., you reward people who take on additional responsibilities, who become team leads down the line, etc. As much as you can, be clear about how these opportunities to revisit employee compensation.
It's helpful to explicitly state when growth in your role is grounds for a change in compensation, such as if there's a change in role scope, or at a particular evaluation period throughout the year. An example might be, "We give performance bonuses in July, and have promotion/compensation discussions every January."
Company values or principles—
Having a framework for how employee performance, skills, and experience are judged is key - even for existing employees:
Do you reward people with a certain level of experience or expertise, or do you pay team members across levels consistently?
Do you reward people with spot or end-of-year bonuses, depending on company performance?
Do you always give an annual cost of living increase to your employees?
Benchmark heuristics —
Benchmarking is helpful for employers and candidates alike, but blanket benchmarks for a position are rarely very helpful. The reason why is because companies and candidates evaluate best based on their respective markets — a company may benchmark against other Series A companies and an individual VP of Sales may benchmark against other VP Sales friends.
Here are some ways to hone in on the "how" of your benchmarking so you can extend thoughtful offers out:
Your marketing/sales/revenue organization's benchmarks may be more closely linked to the yearly revenue of the company, rather than company size or other factors.
Your finance organization's benchmarks may be based on company stage, given the size of the company's budget and spend.
A VP of Customer Success comp benchmarks may be influenced by the number of customers or the number of customer success managers they would manage.
Equity vs. cash vs. benefits
Companies might settle on one of or a variation of three common shorthand compensation philosophies (what you might hear or say during the offer stage, or from other people who work at the company)
High cash/low equity: This is more common as funding and company size grows.
Low cash/high equity: This is best received when the "high equity" is truly meaningful, and not just seemingly high vis-a-vis a low cash offering.
Low cash/low equity/high benefits: This company likely gives employees very generous benefits (healthcare coverage for you and dependents, onsite daycare, hefty retirement packages with large matching and annual bonuses etc.) and is less competitive (intentionally) on other axes of their compensation.
Compensation Philosophy Examples
Molly Graham, who outlined Quip's compensation philosophy, described how the company didn't shy away from speaking about the compensation philosophy early and often.
🗣 "At Quip, every hiring manager sits down with their prospective candidates to explain how the company manages salary and equity. Everyone gets the same talk. “We tell them, ‘Everything we do is formulaic,’” she says. “We explain how everyone in the company that has a certain amount of experience gets paid exactly the same, we explain that we don’t negotiate and see how they react.”
The following is an example of Citi's compensation philosophy:
The following outlines part of Netflix's talent philosophy:
Dover partners with Pave because they help companies benchmark compensation across the board, and integrate with your systems so you can maintain up-to-date data.
Pave allows you to...
Choose the roles you're benchmarking for:
Select for the role level and leveling framework:
Choose the locations you're benchmarking against:
As well as the companies you'd like to benchmark against (see our section on benchmarking heuristics above):
The end result is a benchmarking framework based on relevant sample data that you can use to structure your offers.
You can learn more about Pave and our other partners on our Partners page.
Create a transparent leveling framework across the organization
Job levels can help you create salary bands for certain levels of responsibility/ownership, paths for development for individual contributors and managers, and delineations of responsibility across the organization — all helpful inputs that tie back into your compensation philosophy and help candidates make sense of their potential career paths and earnings.
Carta has a helpful leveling guide for Seed and Series A/B companies that can be downloaded here.
Practice delivering your pitch, and include the "why" behind your philosophy
Your offer needs to include enough information for an employee to be able to value it, especially vis-a-vis other options. While it's not possible to know what outcomes your or other companies will experience, and therefore to assure a potential hire that the equity portion of their offer will certainly amount to more than another offer, it is quite easy and beneficial to be as transparent as you can be. If you hide or try to sneak around this information, it creates unnecessary skepticism on the part of the employee about what's going on — presenting it plainly ensures that the candidate feels like they are being given the tools needed to make a decision.
When communicating the equity portion of a candidate's offer, it's helpful to include:
the percentage equity the candidate is being offered as well as all outstanding shares
the company's valuation after the last round of funding
what form the equity will take ie, RSUs vs ISOs, and the vesting/exercise schedules
You can send candidates a link to an equity calculator here.
Highlight your employee benefits philosophy, too
Salary and equity are not the only things that employees consider when evaluating their offers. Include information about
Health/dental/vision/life insurance and dependent coverage
401k and matching
Commuter benefits or other stipends
Time off - vacation time, company holidays, sick leave, volunteer hours
Remote work flexibility
Consider whether you have a benefits philosophy in place alongside your compensation philosophy. An example benefits philosophy might be:
💬 "We want you to be super invested when you are at work, but when you are not, we expect you to really unplug. So when you are in the office, we have all your meals, breakfast, lunch, and dinner, we try to take those chores off your plate. We also give you a One Medical subscription totally free, so you can see a doctor via e-visit for free at any time.
On the unplug side, we offer unlimited PTO with a 2-week minimum (you have to take it) we also have a "treat yo self" day where the company will let you expense up to $100 for a fun experience every quarter to take a break — on us.
We give you $50 of Lyft credits, and free Spotify, so when you need a break, it's easy to disconnect."