Tackling the ‘compensation model’ headache
Adapting the compensation model has been one of my latest nightmares at my previous startup, 1001pharmacies.com. The business and the team had grown very fast and the salary system was lagging behind. I made a lot of mistakes while trying to fix that. So here are some words of wisdom from other entrepreneurs and my own painful experience, that would have spared me weeks of headaches and defocus.
Foreword: Why bother with a compensation model at all? As long as you pay them.
As author Daniel Pink puts it, quoting several scientific studies:
Money does not motivate people. Money can only make people demotivated, if the salary is perceived as unfair or unadapted.
— Pink’s brilliant book: Drive — The surprising truth about what motivates us
But as long as you surpass this demotivation level, motivation derives from other drivers (autonomy, purpose…). We all know that motivation and engagement make a lot for a team’s efficiency... So at least you need a compensation model ensuring that:
- salaries are consistent among your team members. Same job, same impact → same paycheck (women included!).
- salaries are correlated with labor market tendencies for each job.
- lowest salaries allow a decent standard of living.
And let’s break a myth: people always get a sense of how much their colleagues are paid. Even in France (where income is quite a taboo), employees talk about it. I also have heard of/seen several cases of teams deciding that everyone publishes internally their own wage, without asking permission for this initiative ;)
1st step: What is your next business goal? What do you expect from everyone in your team?
As Oussama Ammar, co-founder of TheFamily, puts it in his video: Startup employees — how to pay them right: a company’s compensation model mirrors its culture and how its employees are encouraged to behave.
That is why there can be no ‘one model fits all’, no silver bullet system that deals properly with wages in any given organization.
Which business goal do you need everyone working on?
The compensation model needs to evolve with the company. I would not bother creating one for a very small team (< 10–12 ppl). But when the business and the team grow, it needs to be reviewed regularly, at least at every major milestone. Oussama Ammar suggests to ask yourself: ‘What’s my next big business goal? How do I get every team member aligned on that goal?’.
Eg.: Say you are an eCommerce double-sided marketplace. If your goal is to build the offer, its makes sense to pay for business development skills, such as people who are good at recruiting new merchants. Then if your focus shifts to acquiring more customers, now you need analysis and support skills (among others). That is, people who work with your merchants so that they adapt their quality of service and their products offer to meet the customers’ demand. Fail to adapt your compensation system to this new business goal, and you will have biz dev people still struggling to onboard more merchants… while the merchant’s offer does not fit your customers’ expectations. Didn’t you need everyone to focus on selling more stuff online?! (true story)
Which values and behaviors do you expect from everyone at work?
Apart from aligning everyone on the same business goals, compensation design should also reinforce the values and behaviors you expect from your team.
Before even talking about wages, you need to wonder: Apart from technical/vocational skills, what do I expect from my team members?
Eg. 1: At OpenClassrooms, co-founder Mathieu Nebra explained to me, human (‘soft’) skills are also taken into account for the salary calculation, such as one’s ability to give and receive feedback. So much so that the higher salary level for each role is only based on personal and interpersonal skills.
→ If you expect everyone on your team to be serious about some human skills and behaviors, consider taking them into account when evaluating the salaries.
Eg. 2: At 1001pharmacies.com, we had one person whose job was to do the front-end integration. He was also dealing with our UX/UI. So he reacted to the ‘expertise’ criterion, (appropriately) explaining that if he was to be a front-end superstar then he needed to focus only on this area, and stop spending time on the UX/UI.
→ If you use an ‘expertise’ criterion alone to evaluate one’s skills and salary, you are implicitly encouraging her to focus on one area/skill rather than being multi-skilled. Be mindful of what you need and are promoting.
2nd step: Time to be clear about the value each one brings to the company, her skills, and market wages
People don’t bring equal contribution to a team
Again, Oussama Ammar states it very clearly. Regardless of how hard they work, not every employee brings the same value to the company. Some people definitely have a bigger impact on the organization, or would be more costly to replace, than others. Making this clear to everyone is one of the CEO’s responsibilities, as tough a moment as this might be.
Eg.: At 1001pharma, we had a guy who had asked for a specific job title, that implied a lot of responsibilities he actually did not have. We had agreed because we did not care about job titles. Things got a little more annoying when he asked to be paid according to his job title — it was time to explain what the company needed and did not need…
Salary evolution is about skills — vocational and/or human
OpenClassrooms’ Mathieu Nebra offered me a ‘That’s it!’ moment when he told me, about discussing raises with employees:
This is not a talk about money. This is primarily a talk about skills: where the person is standing, what is valued, which skills she needs to acquire now. This way, it brings a lot of clarity to everyone.
Everyone needs feedback on their work, and guidelines to follow to get better. Most people love to have some visibility on their future, on the track they are on. So it creates a lot of value for individuals and for the organization to clarify these points before putting numbers and dollar signs in from of them.
It is dangerous to ignore market salary tendencies
At Buffer, their famous salary formula uses a salary base for each role. They derive this base from a study of average wages for each role in the US, which I find very smart. But it happened to be troublesome when I tried to use it just the same:
- The studies I found would not have all the roles I needed,
- Salaries vary widely across locations, even inside one country,
- Very different missions can hide behind one job title. So the market average wage for one title may be completely inconsistent with how much you are willing to pay for this role at your company.
- The day you need to hire a superstar, there’s no way she fits in the market average wage for her category.
So I suggest using the market salaries as a reference rather than a direct basis for wages calculation. Instead, I would create my own basis, based on market salaries but also on how much value each role is expected to create. I would make the salary base explicitly subjective to my own/my organization’s perception of value and needs.
3rd step: Location and personal situation matter too
One’s personal situation obviously affects her financial needs (having kids for instance). Failing to take it into account can throw her below the minimum standards of living and cause the paycheck to be seen as unadapted… thus leading to demotivation.
For the same reason, wages need to be adapted according to the geographic location. Obviously, in London, basic elements of living are much more costly than in Montpellier, south of France.
Some more things to end with
Internal communication: Instead of letting word of mouth, (false) rumors and little scandals spread, I suggest you clarify things upfront. The minimum is to indicate clearly what is taken into account and let every person know how you evaluated her. Better is what’s practiced at CaptainTrain (now Trainline) according to founder Jean-Daniel Guyot: communicate the whole salary grid, even to potentiel hires (but not how people are positioned on it) - Oh, OpenClassrooms as well, here. Lastly, you can publish internally how everyone is paid, and why. This will force you be consistent and honest ;)
Keep in mind that the publication is really the last step of changing your salary model. By the time you have completed all the previous steps, the team almost does not care anymore about the publication.
Frequency of salary review: Things change quickly inside a startup, so reviewing salaries once a year is a minimum. Alice Zagury, cofounder of TheFamily, explained to me they have a very radical (and smart) policy of ‘UP or OUT’ every 6 months: whether you get a raise, or you get out. Jean-Daniel Guyot (Trainline) told me they review wages once a month, thanks to the preparatory work of the HR dept (this frequency is unrealistic without them).
No 100% objectivity: I personally gave up on the idea of a salary framework being 100% objective, 100% formula-based. From my own experience, it is either unrealistic, or an everyday hassle to keep it working. At least you will need a salary range for each role, to allow for a little flexibility.
Duration and defocus: Changing the salary framework at 1001pharma took me quite a long time and it caused defocus for me and for the team. The last thing you want is your team thinking more about their salaries than about the company’s goals, so be careful and keep the process short. Note that working on this process with your team makes it necessarily longer (3–4 months says Mathieu Nebra), but more customized and inclusive.
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Now, what do you think of all this? Some more testimonials and remarks in the comments will definitely be useful!