Startup compensation is broken

by Emily Kramer

This is the first in a series of posts about fixing compensation from Help Wanted Project—we offer free salary and equity reviews. After exposing the gender equity gap and launching the Table Stakes initiative while at Carta and filing a lawsuit against the company for unequal pay, I’m determined to solve this problem.

When it comes to compensation (inclusive of salary, equity, bonuses, benefits, and compensation philosophy), startups are failing employees. Many companies prominently tout values of transparency and fairness on career pages. These same companies are far from clear about compensation despite the importance and impact of compensation. Behind the scenes, rampant biases and discrepancies go unchecked, even for companies with the best of intentions.

We need to fix this. Massive amounts of wealth are created by private company ownership and high salaries paid in this industry. And with money comes power (unfortunately) and the ability to drive change. If we want to see other changes, especially related to DEI, compensation needs to be fixed first. Without establishing fair compensation practices and clearly communicating them, any other DEI effort is relatively meaningless. Aside from the ethical issue here, hiring and high turnover are expensive.

To play this out…

• If an employee finds out that a co-worker in the same role (with the same experience and similar performance reviews) has a different salary, that employee immediately loses trust in the company.
• If an employee finds out that someone else got a raise, promotion, or equity refresh simply because the other person asked and they didn’t, they will lose trust. They might even leave.
• And worse, if people find out underrepresented groups are paid lower on average because compensation was based on whatever number they gave when they got the job, not only do employees lose trust, but so do customers, investors, and candidates. This is also unethical and unlawful.

Companies need to make fixing compensation a top priority. It’s imperative if we want to fix other systemic issues in the workplace.

What’s broken about compensation?

First, we need to recognize what causes compensation to be so broken in the first place.

Inconsistencies: I’m regularly flabbergasted by offers; we’ve reviewed hundreds via Help Wanted Project. Sometimes they are way above benchmarks, sometimes they are insultingly low, and sometimes they are just confusing. This seems especially strange in an industry that relies on two main sources for salary and equity data (Radford and OptionImpact).

The main cause of these inconsistencies, beyond startups’ varying abilities to pay, is a lack of consistency in levels, titles, and/or roles. Benchmarks aren’t applied consistently because the data often does not match apples to apples for the roles at each company. People are also placed in incorrect levels, as these levels are subjective and/or undefined. And mis-leveling is often used as a “cheat” to pay certain candidates above salary band constraints, which is completely unfair to their peers doing the same work.

Without an easier system for applying benchmarking data to corresponding levels and a more objective way to tie roles and people to levels, the data sources we have are nearly useless.

Low-balling: There are two issues that lead to low-balling: One, compensation in the offer is set low to leave room for negotiation, and those that do negotiate with the right recruiter get more money.

Second, recruiters, HR, finance, and hiring managers suggest numbers without a clear system. It’s amazing how many compensation approvals happen quickly with so little thought, when these decisions have lasting impacts on people’s lives due to how salaries compound and how equity can rapidly rise in value. What’s worse is that some hiring managers and recruiters feel like they get a win if an offer is accepted at a lower salary than they’d budgeted for.

We need guardrails in the form of tight compensation bands. And we need compensation plans that allow people to get paid for the work they are doing, not for how well they negotiate or understand compensation.

Information asymmetry: Currently companies and VCs have significantly more data about compensation. From Radford to OptionImpact, VCECS, and industry knowledge, the hirers have a huge leg up. Industry knowledge about comp should not be a factor in how much you get paid.

Adding to this, many people think it’s taboo to talk about compensation. So it’s hard for employees and peers to band together to determine what’s fair. Luckily, many relatively new resources (81 cents, Levels.FYI, Candor.co, and our Help Wanted Project) help employees, but we have a long way to go.

But the lack of clear industry comp data isn’t the only problem. Companies themselves amplify this problem when they don’t talk about their compensation philosophy and system. Companies don’t make it clear how compensation is set, if they allow for negotiation, how to value equity, etc. They often don’t even tell employees what level they are matched to, and how to get to the next level. This makes it harder for candidates to know what they deserve and when to ask for a role or compensation review.

Until companies make it clear how compensation works within their company and we have better sources of publicly available information across companies, unfairness will persist.

Broken systems & compounding effects: The tools used to create compensation plans are less advanced than the tools and processes we use for far less crucial tasks. Most HR, Finance and Recruiting teams are still using a mix of various Excel sheets. With such a rudimentary system (no offense to Excel), audits of existing compensation are rare and often ineffective.

Many companies wait way too long to put in any system at all and come up with offers and comp increases as needed. It’s hard to get compensation right when you don’t take a holistic approach from the beginning.

When the system isn’t set at the beginning, tenured employees are often compensated differently from newer employees — huge discrepancies in both directions on salary and equity are commonplace. Candidates are typically under-compensated significantly if they move up the ladder or make an internal transfer. They are given percentage increases off their old salary when the comp bands for new employees have stepped ahead significantly. It’s ridiculous that high-performing employees often think its easier to get a new job than to get compensation increases at their current company.

This compounding effect also applies when people switch companies. While illegal to ask about past compensation in California, many employers ask anyway. In other states, you’re allowed to ask. When previous compensation is used to generate offers, the problem perpetuates itself. People with low compensation can never catch up to their peers.

How companies can fix compensation

When employees do not have enough information and companies create imperfect compensation plans with little oversight, unfair compensation goes unchecked.

I believe to build a fair system for compensation and create an equitable and inclusive environment for all employees, companies need to:

• Establish a clear and consistent system, a “compensation philosophy”
• Communicate that system to existing employees and candidates
• Audit their system regularly, preferably by a 3rd party, to ensure it is working…for everyone.

I’m not mandating that all companies share every salary and option grant with the general public (although I’m not opposed to it), but I am suggesting that every company publicly state the basics of how salary, equity, promotions, and increases work at their company.

Compensation is the main reason most people work, even at mission-driven startups. We need to do more to get this right.